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. Last Updated: 07/27/2016

Ulyukayev Says Extra $92Bln to Be Printed

MTUlyukayev said a reduction in loans to banks would keep inflation down.
The Central Bank said it would print an extra 3.2 trillion rubles ($92.03 billion) to cover this year's budget deficit without causing further declines in the country's forex reserves.

The currency slid to its lowest position against the dollar in 11 years on Wednesday, hitting 36.56 per dollar and edging close to the 41 level against a dollar/euro basket, which the Central Bank has vowed to defend with its foreign currency reserves.

Rating agencies are closely watching the size of Russia's reserves, still the world's third-largest at $383.5 billion, which lost over a third of their value because of the Central Bank's policy of gradual depreciation of the ruble.

The government keeps $222 billion of rainy day savings in foreign-currency accounts in the Central Bank and will need about $90 billion to cover the budget deficit. Many analysts say this will deplete the reserves even further.

"This suggestion is methodologically wrong," the Central Bank's First Deputy Chairman Alexei Ulyukayev said in an interview cleared for publication on Wednesday.

"Roughly speaking, our reserves will be $100 billion more in 2009 than some analysts had thought. And surely they can be used for purposes corresponding to the international definition of reserves," Ulyukayev said.

The government is currently working on a budget deficit assumption of 8 percent of GDP for this year, which Ulyukayev said would equal around 3.2 trillion rubles from the $137.3 billion Reserve Fund, part of the rainy day savings.

"At today's exchange rate, that is around $90 billion, they must be sold by the government to us ... and we will [print] 3.2 trillion rubles, which will be used to fulfill budget obligations," Ulyukayev said.

He added that the same process would apply if the government decided to use some of its $84.5 billion National Wealth Fund, also kept at the Central Bank, to issue subordinated loans to the country's struggling commercial banks.

Ulyukayev said the move would not be inflationary, as it will be compensated by a reduction in the liquidity offered to commercial banks. The Central Bank is for now sticking by its inflation forecast of 13 percent this year.

"If the government increases the budget deficit by 1 percent of GDP, that means we must reduce loans to banks by 1 percent of GDP," Ulyukayev said. "If that happens, then the impact on inflation is zero."

Ulyukayev said the Central Bank has been raising rates and cutting limits on collateral-free loans to commercial banks -- the easiest form of refinancing used by banks to borrow 1.9 trillion rubles from the regulator.

He said that for the purpose of containing inflation, the exchange rate policy at the moment was more important than fiscal policy.

"If we can dampen devaluation expectations and there will be an understanding that the exchange rate will stay within boundaries written in the budget, we will meet the 13 percent inflation target," Ulyukayev said.

Ulyukayev said inflation rates may jump in February or March, as prices for imported goods come into line with the weaker ruble, but will then stabilize.

Finance Minister Alexei Kudrin has said inflation could reach 14 percent, up from 13.3 percent in 2008.

Prime Minister Vladimir Putin said the deficit should stay within limits recommended by the Central Bank and the Finance Ministry in order not to fuel inflation.