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. Last Updated: 07/27/2016

Central Bank to Execute Refinancing Rate Cut




The Central Bank, under pressure from acting President Vladimir Putin to make credit more accessible to industry, has cut its largely symbolic refinancing rate to 45 percent from 55 percent.


But after the Kremlin boss dismissed an appeal earlier this week, Central Bank chairman Viktor Gerashchenko is again trying to win government backing for his proposal to require exporters to sell all of their hard currency revenues.


The bank said in a Friday statement that the refinancing rate cut would take effect Monday.


Economists said yields on the tiny domestic treasury bill market could drop in response, keeping within an unofficial cap of twice the rate, but industry was no nearer accessing credit since the rate is not used as a basis for lending.


Putin has nonetheless urged the Central Bank to send a signal to financial markets by significantly cutting the rate, which, paradoxically, is the most-watched but one of the least used.


"Without targeted orientation by banks toward the real sector it is impossible to expect cardinal, positive change in Russian industry," Putin said this week in a statement identifying the top priority of the Central Bank as refinancing banks.


Russian banks, many still crippled from the 1998 financial crisis, are wary about lending to industry, though rubles are not especially dear since the 1998 devaluation.


Overnight loans between banks operating on the foreign exchange market are about 5 percent annualized, but banks rarely make ruble loans for more than a few months due to instability in the banking sector, Russian industry and the ruble.


"The problem of crediting Russian industry is not so much one of rates as of dubious management in many industries - of finding a good borrower," said Natalya Orlova, an economist at Alfa Bank.


"This action and further cuts by the Central Bank are not likely to increase seriously the amount of credit to industry."


Putin's recent call to cut rates met skepticism, since a real cut would also pressure the ruble, which at 28.44 per dollar is down more than 5 percent this year, despite firming recently.


Recent Central Bank action has tended to push up rates. The bank recently increased commercial banks' reserve requirements, soaking up rubles and making them more expensive to borrow.


And a $300 million increase in reserves to $12.6 billion last week that was reported Thursday was interpreted by Raiffeisen Bank as an indication that the Central Bank was printing rubles.


Troika Dialog investment bank interpreted the rise as a sign the Finance Ministry was paying little foreign debt.


"This week the ministry is likely to buy up to $300 million for payment of Eurobond interest due Jan. 24. We expect that the next announcement of Russia's reserves will reveal another drop of several hundred million dollars, and the value of Russia's gold and hard currency stock will close the month around $12 billion," Troika Dialog said.


Gerashchenko said Thursday that if the government obliges exporters to sell 100 percent of hard currency revenues instead of the current 75 percent, the Central Bank's reserves could be boosted by $3 billion to $4 billion


"In this event, exporters wouldn't lose anything," he said on ORT television late Thursday, adding "any company can buy as much foreign currency as it needs."


Gerashchenko argued that the step was necessary to help prop up the ruble, prevent runaway inflation and stave off a major revision of the budget. The law allows exporters to retain 25 percent of revenues in hard currency in order to make equipment purchases abroad.


If implemented, Gerashchenko's plan could widen the gulf between Russia's policies and International Monetary Fund demands of increased economic liberalization. The IMF opposes all currency controls as inhibitions to economic growth.


The fate of a delayed $640 million IMF loan installment to Moscow will be on the agenda Saturday of a meeting of finance ministers from the Group of Seven leading industrial nations in Tokyo .


The G-7 will be looking for reassurances from First Deputy Prime Minister Mikhail Kasyanov, who will attend part of the talks, that Moscow will plow ahead with economic reforms under Putin.