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. Last Updated: 07/27/2016

Russia Raises Key Rates to Cap Yields




The government raised Lombard rates between 36 percent and 40 percent.


The Russian stock market recouped some of its losses Friday but still ended down after the government announced that it was raising a key financial rate to stem soaring yields on the government debt market. Refinancing rates were kept steady.


The government raised 3-14 day Lombard rates to 36 percent from 30 percent and the 15-30 day rate to 40 percent from 30 percent. The move is seen as an attempt to block commercial banks that borrow cheaply from the government and invest in high-yielding securities.


"With yields so high, we cannot expect the market to be strong," said Kirill Maltsev, a trader at Rye Man & Gor. He said the government's announcement lent a measure of optimism to the weak stock market, which had lost as much as 4.5 percent by noon.


The Moscow Times Index of 50 leading shares ended the day down 2.7 percent, as compared to more than 5 percent Thursday. The index stood at 191.06 points Friday, finishing on volumes of $102 million.


The market has lost 16 percent of its value during the week.


Central Bank Deputy Chairman Sergei Alexashenko said the current situation did not call for an increase in refinancing rates. "Taking into account the stability of the Russian economy and seeing that inflation is going down, the central bank does not see any reason to change its monetary policy significantly," Alexashenko said on Reuters Financial Television.


Markets had been expecting a review in refinancing rates, after yields on government securities climbed 40 percent Friday. Foreign investors, seeing the instability in Asia, have been slowing down investments in emerging markets.


The government was forced to draw from its coffers to repay maturing debt after a poor auction of state securities Wednesday, fueling fears that nonresidents had started withdrawing from the GKO market to invest in foreign exchange.


One analyst said the bank had acted wisely in leaving the refinancing rates untouched, because it was essentially a benchmark with little effect on real lending.


"The refinance rate plays an indicative rather than a real role while the Lombard is the real rate at which loans are given," said Dennis Smyslov, chief finance strategist with Global Fund Management. He said the pressure on the ruble is not indicative of any serious danger.


"There is $18 [billion] to $19 billion in foreign money sitting in the GKO market," he said. "Even if $1 billion had exited, it would have shown up strongly."


"It is a matter of a couple of weeks to show they have the situation is under control ... a sign that they see no cause for worry in the long term" said Andrei Arofikin, head of Russia and CIS equity at CS First Boston in London.


On the fixed income market, yields on one-year securities climbed over 40 percent. Yields on 6-month and 3-month treasury bills were over 30 percent.


But some analysts said that leaving the refinancing rate so much lower than yields would lose its meaning as a benchmark rate.


"This is reminiscent of last November," said Robert Devane, head of fixed income at Troika Dialog. "We again have a scenario when the market is saying one thing and the central bank is saying another."


When the first wave of the financial turmoil hit last year, the Central Bank resisted increasing rates, instead spending billions of dollars to keep the ruble steady.


But depleted hard-currency reserves and a huge debt buildup leave Russia more vulnerable today, Devane said.


Russia is awaiting release of another tranche of $700 million loan from the International Monetary Fund, which is due to send a mission later this month.


Currency dealers say any delay in releasing the money could further erode market sentiment.


Experts said the central bank is hoping to ride the current crisis. "Worst comes to the worst they can always raise the rates," Smyslov said. "If the sell-off stops they will lower the Lombard rate."


Prime Minister Sergei Kiriyenko on Friday reiterated his commitment to tighten spending, adding that government measures have significantly helped increase revenues in March and April.


"The bank has tackled the turmoil in a professional way," CSFB's Arofikin said. "Now it is up to the government to get the fiscal side in order."