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. Last Updated: 07/27/2016

Central Bank Warns of Liquidity Crunch

UnknownOleg Vyugin, first deputy chairman of the Central Bank.
The Central Bank said ruble supply was likely to be tight in September, discouraging local banks from mopping up the U.S. currency, Oleg Vyugin, first deputy chairman of the Central Bank, was quoted as saying by Interfax on Tuesday.

"We made a forecast of liquidity until the end of the month and see that the situation with free funds in September will be rather difficult," Vyugin said.

"That is why we do not want to encourage banks to buy such big amounts of hard currency because if they spend money now they simply will not have enough funds to meet clients' orders to pay taxes to the budget. That will force banks to sell currency to the Central Bank, possibly at a loss."

Ruble liquidity traditionally narrows in the middle and at the end of the month, fueling the rise of interbank lending rates when firms pay taxes to the budget.

Higher demand drives up interbank rates and usually firms up the ruble, which gained in the first half of the year thanks to Russia's robust balance of payments.

But in September, ruble sentiment appeared to have changed because of a seasonal weakness in the current account and lower capital inflows after the Central Bank in July halved to 25 percent the amount Russian exporters had to sell at home.

The dollar drought sparked speculative pressure on the ruble and the Central Bank was forced to sell about $700 million for rubles in the first week of September to defend the national currency, which traded at 30.70 per dollar on Tuesday.

The ruble shortage led to double-digit overnight ruble lending rates, which stood at 13 percent to 17 percent by 2 p.m.

To offset the liquidity squeeze, banks rushed to the Central Bank, putting up as collateral about 17 billion rubles worth of ruble-denominated securities at Monday's one-day repo auction.

"One has to have in mind that refinancing operations will not help in case banks pursue erroneous policies, including the forex market," said Vyugin, who is responsible for the Central Bank's monetary policy.

Dealers said the comments were unlikely to boost the ruble.

"Now the dollar rise trend is stronger, and the only question is how fast it will gain, but that fully depends on the Central Bank," said Alexei Bukleyev of Alfa Bank. "If at the end of the third quarter there is a liquidity crisis, people will roll over it to make a profit buying dollars afterwards."

Banks' balances in their correspondent accounts at the Central Bank -- a key sector liquidity indicator -- rose by about 6 billion rubles to 91 billion rubles on Tuesday but were still some 14 billion below the daily average in August.