(Business Insider) --- In his annual
address to the nation on Thursday, Russian President Vladimir Putin announced
that the country's reserve funds, usually earmarked for investment in state
projects, should be
In particular, the
move strongly suggests that the Russian banking system has been running out of
collateral that can be used to get dollars from the central bank. Access
to dollars is critical because the banks took out foreign-currency loans from
investors that they have to pay back in the same currency. Current estimates
suggest Russian businesses need to repay $35 billion this month.
But Russian banks
face major challenges funding this, with Western sanctions freezing them out of
global capital markets on the one hand and a weakening domestic economy putting
pressure on profits on the other. These issues have been compounded by a fall
of about 40% in the value of the rouble since June. As the rouble loses ground
to foreign currency, those debts become increasingly difficult to pay back.
Usually it is the
job of the central bank to provide emergency funding for a country's financial
institutions. In Russia
this is typically done through what are known as "currency repo
auctions," in which banks offer collateral (like high-quality bonds) in
exchange for access to currency, especially dollars, that they need to meet
foreign-currency obligations.
However, this
facility has seen limited use by Russian banks despite the rouble falls. The
central bank had tried to explain this by saying low demand was a consequence
of there being plenty of dollar liquidity in the financial system.
Putin's statement
that the country's reserve funds should be used instead to back its banks
strongly suggests that this claim was wrong. There was not a lack of demand —
rather, the banks' collateral was insufficient to get dollars in exchange.
On Thursday the
Russian central bank cut the foreign exchange repo rate, the interest rate
it charges on the currency it gives to banks. The rate fell from 1.5% above the
London Interbank Offered Rate (Libor) — the benchmark interest rate at which
banks lend to one another — to 0.5% above Libor. A lower interest rate should
make it less expensive for banks to borrow from the central bank and therefore
more appealing.
The rate cut
illustrates that the central bank is growing concerned about the ability of
Russian banks to meet their debt repayments. If they fail to pay, it could
trigger a wave of defaults that would further hit the fragile Russian economy,
which is already expected to fall into a recession in 2015.
Yet if the problem
is a shortage of collateral, these measures are unlikely to be enough. Back in
February, JPMorgan analysts warned of just such a scenario: about 60% of
available collateral was already pledged of an upper limit of about 75%.
That top level is the point at which JPM says the stress in the banking system,
in the form of increased risk of default, may start rising rapidly.
We appear to be
near that point.
Judging by
Thursday's news, banks appear to have been forced instead to seek help from the
state.
This would explain
Putin's move to divert money usually earmarked for infrastructure investment
(for example, in Russia 's
ageing road and rail network) into a bank bailout. Here's the passage from his
speech:
Reuters reports
that VTB and Gazprombank have already applied for 250 billion roubles
($4.7 billion) and up to 100 billion roubles in additional support. This would
put a further dent in Russia 's
reserves after the country saw total international reserves drop some $90
billion so far in 2014, mostly in failed attempts to buoy the rouble.
It might also open
the door for non-bank companies to lobby for additional support. The oil
company Rosneft requested 2 trillion roubles last month but was turned down.
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