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. Last Updated: 07/27/2016

Central Bank Acts To Reduce Cash Inflow

The Central Bank said Monday that it would raise minimum reserve requirements for banks from July 1 to fight inflation pressures caused by large capital inflows.

A series of major business deals is sucking huge sums into Russia. They include asset sales of bankrupt oil firm Yukos and the world's largest stock market float this year by the country's No. 2 bank, VTB.

"The current situation is characterized by continued capital inflows into Russia that require measures aimed at smoothing possible inflationary effects linked to this process," the bank said in a statement.

The bank will raise reserve requirements on nonresidents' deposits at Russian banks in both rubles and foreign currency to 4.5 percent from 3.5 percent. Requirements on individuals' ruble deposits will rise to 4 percent from 3.5 percent.

The reserves amounted to 209.6 billion rubles ($8.1 billion) as of April 1, according to Central Bank figures.

Russian banks owed over $100 billion to foreigners as of Jan. 1. The move means banks will need to set more money aside at the Central Bank when borrowing from their counterparts abroad, issuing eurobonds or taking deposits from individuals in Russia.

Analysts see the measure as helping the Central Bank tie up about 40 billion rubles ($1.55 billion). The government is about to inject 680 billion rubles ($26.36 billion) under a spending drive announced by President Vladmir Putin last month.

The hike in reserve requirements amounts to a tightening of monetary policy and poses less of a risk on the capital account than would a hike in interest rates, which would probably attract further inflows of speculative money.

Amid abundant liquidity, the Central Bank has only a limited arsenal to fight inflation. Its main anti-inflation tool is the nominal exchange rate of the ruble.

Both the Finance Minister and head of the Central Bank said the country was still on track to meet its 8 percent inflation target in 2007, but many analysts doubt the target is attainable.

"[Raising reserves requirements] is their last resort after the ruble exchange rate and money market instruments," said Nikolai Kashcheyev, analyst at VTB. Consumer prices grew by 4 percent in the first four months of this year.

Yevgeny Nadorshin, analyst at Trust Bank, said the measure could knock a couple of percentage points off full-year money supply growth, which he forecasts at 45 percent, but will not have a major impact on inflation.

Net private capital inflows in the first quarter of 2007 reached $13 billion, compared with an inflow of $14.3 billion in the fourth quarter of 2006 and of a record $41.6 billion in the year as a whole.

Finance Minister Alexei Kudrin said that, despite the inflows, Russia was on track to reach its 8 percent inflation target in 2007, but may pay a price through appreciation in the ruble's real effective exchange rate.

"Our inflation target is achievable and will be reached. ... If there are any risks, these are not inflation risks but ruble appreciation risks," Kudrin told a parliamentary budget hearing.