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. Last Updated: 07/27/2016

2nd Bank Swap Clears 10.6Bln Rubles of Debt

The Central Bank announced Monday that it had shaken another 10.6 billion rubles ($668 million) in debt payments out of commercial banks during its second sector overhaul Friday, freeing up the "well-behaved" banking community to trade on currency exchange markets this week.

Traders said the Central Bank's heavy interference on the foreign exchange market resulted in only a small slump for the ruble. The official exchange rate for Tuesday has been set at 15.99 rubles to the dollar, representing a 0.69 percent drop from Monday's rate of 15.88 rubles to the dollar. But, according to analysts, the debt swap and the Central Bank's emission plans may undermine any positive effect of the debt repayment scheme and the interference.

The Central Bank's first deputy chairman, Andrei Kozlov, said commercial banks showed more openness Friday in declaring their debts than they had done during the first debt swap Sept. 18. Then, the Central Bank punished the more reticent banks by banning them from the ruble-dollar trading on the Moscow Interbank Currency Exchange. But on Monday, Kozlov announced that the ban was now lifted. "Banks behaved themselves, and the Central Bank will not ban anybody from trading this week," Kozlov said at a news conference.

Even with all banks free to trade, the currency market was quiet Monday, with just $38 million traded at an average of 15.9 rubles to the dollar.

"It is the market's opinion that the Central Bank is intervening to keep the ruble steady and to let it fall gradually," said Sergei Babayan, a fixed-income analyst at Troika Dialog bank.

From the point of view of foreign investors, the Central Bank also "behaved itself" during its second attempt to clear bank debts. This time around, it did not buy worthless treasury bills from commercial banks: Kozlov said the idea was to try to avoid further antagonizing foreign T-bill holders who are unable to participate in the debt swaps. A group of 18 foreign banks and the Russian government are currently working on a new rescheduling plan for the $40 billion in government debt, frozen by the previous government on Aug. 17.

In Friday's debt clearance operation, banks from 38 Russian regions paid sizable amounts of money to several budgets. The Moscow city and regional budgets received 7.6 billion rubles, and the federal budget gained 1.8 billion rubles. Nevertheless, the Moscow region is still owed 15 billion rubles, Kozlov said.

To repay their debts, banks were allowed Friday to draw up to 30 percent of obligatory ruble reserves in the the Central Bank. They drew 1.96 billion rubles, compared with 3.3 billion rubles Sept 18.

As a result of the two debt swaps, money supply has increased by a total of 5.26 billion rubles. Although the money banks received Friday came out of existing Central Bank reserves and was not "printed" through the redemption of worthless bonds, economists warned that no matter how the increase in liquidity was achieved, it would do nothing to keep the ruble steady if the Central Bank's hard currency reserves fell. By interfering on the foreign exchange market, the Central Bank depletes these reserves.

Central Bank chief Viktor Gerashchenko has said the economy requires an extra 40 billion to 50 billion rubles by the end of this year. Printing this amount of money, primarily through loans to banks, would increase money supply by about one-third. Economists say this would drive up inflation.

"One-third of the monetary base is quite significant," said Tom Adshead, co-head of research at United Financial Group. "But we were quite happy with the [former Deputy Prime Minister Boris] Fyodorov plan to make a one-time emission of 40 billion rubles and then move immediately to a currency board."

Adshead and others said they were more worried that the government would not stop at 50 billion rubles but instead would print more to please constituents demanding cash.

Economist Arnab Das of J.P. Morgan said the emissions are particularly dangerous in a climate where no one wants rubles. "Everyone is focusing on the amount of money that needs to be increased, but that is half the puzzle," he said. "If demand for rubles is down, as it is, it won't take a lot of new rubles to have an inflationary effect."

Next week, the Central Bank plans to repeat the debt repayment scheme, Kozlov said.