“The Russian banking system is experiencing a shortage of currency liquidity amid a record two-year payment of external debt,” according to a Raiffeisenbank report released this week.
In November, banks’ clients withdrew $0.8 billion from foreign currency deposits and replenished their balances on settlement accounts by $1.8 billion. About $1 billion left the system in loans, $0.7 billion was received from non-financial organizations, and another $0.3 billion from financial institutions.
In total, as a result of credit and deposit operations, the banking system had an inflow of currency of $1.1 billion. But “as the main inflow fell on settlement accounts (for which it is necessary to keep a large volume of highly liquid assets), the situation with currency liquidity has not improved,” according to Raiffeisenbank analyst Denis Poryvai.
…at the beginning of December, the foreign exchange reserves of the Russian banking system turned out to be less than the banks’ obligations to their customers. In other words, the “security cushion” of the Russian foreign exchange market, which came to about $13 billion at the beginning of this year, and more than $40 billion in January 2016, has been completely “eaten up”.
Raiffeisen’s Poryvai comments:
To cover the outflows and replenish [their] foreign exchange liquidity, the banks have sold Eurobonds for three consecutive months… VTB [Vneshtorgbank] for example, got rid of Sberbank’s bonds for $460 million in December, placing 2019 bonds for auction.
“Since the beginning of December, the emerging shortage of currency liquidity has been translated into increasing its value on the local market.” …the difference between the RUONIA rate determining the cost of unsecured ruble loans overnight [I believe I have explained this before: the CBR is essentially kiting when they do this. -ed] and the rate of the currency swap, which allows borrowing in dollars, soared nearly 1.5 times. Its value – 160 basis points – is a record since December last year.
The [current] situation is partly helped by high oil prices: Brent at 13.55 Moscow time was $63.80 per barrel versus $54 a year ago. As a result, the situation is not as tense as last December: then RUONIA – the currency swap exceeded 250 basis points…
Meanwhile, the Ministry of Finance is “supporting the market”.
…last week it marked a $1 billion currency deposit in the banking system.
In addition, the Ministry is buying currency on the market “in record amounts ($216 million a day).”
Not only that, but, “…Vnesheconombank [VEB] announced plans to sell $6.25 billion [in exchange] for rubles.”
Recall that the government is keeping money from the National Welfare Fund with VEB.
Apparently, VEB is acting as “a kind of balance in the market”, said Andrei Lushing, Deputy Chairman of Loko-Bank: “there will be no increased demand for currency, which means that the exchange rate will be more stable.”
Raiffeisen’s Poryvai calculates that:
In December, the net inflow of currencies into Russia… will be $10-13 billion…. This is enough to cover the purchases of the Ministry of Finance ($3.5 billion) and the repayment of about 40% of external debt.
However, he concludes:
The situation could be made worse by the 5 billion euro loan to the “Chinese” company CEFC for its “purchase” of a stake in oil giant Rosneft, which VTB [VneshTorgBank] has promised to provide, though no official agreement has been signed [I promise to write about this situation soon].