Russia Weather Financial Risks but More Remain, Bank of Russia Says

By Andrey Ostroukh 

        MOSCOW--Russia's sufficient reserves and flexible monetary policy ensures the country's financial stability for now, but a possible interest-rate increase in the U.S. and unpredictable oil prices keep the central bank ready to intervene, the Bank of Russia said Tuesday.
        Facing soaring inflation and a contracting economy, the Bank of Russia has been increasingly active in adjusting its monetary policy over the past months in an attempt to preserve financial stability. The latest report reckons that Russia's financial system is shielded from existing risks but its future looks uncertain.
        In a semiannual report on financial stability, the central bank noted Tuesday that, in the fourth quarter of 2014 and the first three months of 2015, Russia endured a number of risks to stability. They ranged from the more expected causes, such as Russia's rating downgrade and a lack of foreign currency due to repayment of foreign debt, to such unexpected reasons as a rapid drop in global oil prices.
        "The financial system turned to be resilient to external shocks, which is related to better banking regulation and financial market developments of the past few years," the central bank said.
        As an average oil price of $60 to $65 per barrel is comfortable enough for Russian oil companies and the budget, the central bank said, it is now preparing to address external shocks related to debt issues in Europe as well as risks linked to monetary policy of the U.S. Federal Reserve.
        The Bank of Russia, which cites a Wall Street Journal poll of economists on Fed policy, said a possible increase in the U.S. interest rate in September will make it more expensive for emerging economies to service dollar-denominated debt. Higher rates in the U.S. will put selling pressure on such emerging currencies as the ruble, and may spur capital outflows, the bank said.
        The Bank of Russia said it can't rule out another wave of volatility on global markets on the back of higher U.S. rates, which could prompt the Russian central bank to intervene in the currency market and to boost lending of dollars domestically.
        At the same time, emerging market economies are likely to continue dovish monetary policies given risks stemming from poor domestic demand. The central bank of Russia is also widely expected to ease its policy further, after four rate cuts brought the key rate to 11.5% in early June.
        Though the central bank's and the government's anticrisis measures helped to mitigate financial risks in the past few months, Russia's banking system isn't in the best shape. According to the central bank, the share of bad loans will reach a peak of up to 17% in 2015 and the first half of 2016 before an expected decline later.
        The central bank reiterated that the current amount of international reserves of around $360 billion looks sufficient, though it needs to be gradually boosted to $500 billion to cover possibly massive capital flight given than global capital markets remain shut for Russian borrowers.
        As Russia drained more than $150 billion in net capital outflow in 2014, when the West imposed sanctions against Moscow over its role in the Ukrainian crisis, Russia's gold and forex reserves fell drastically. To avoid a deeper financial and economic crisis, the central bank limited the ruble's depreciation throughout 2014 by selling billions of dollars of foreign currency, which sent foreign exchange reserves from some $510 billion in late 2014 to their lowest levels since 2009.
        After Western sanctions cut off Russia from global capital markets, the Bank of Russia also used reserves to provide foreign currency to the financial system, injecting $36 billion as of June 9. This helped to compensate for the lack of borrowing opportunities during the peak payments on foreign debt between October and April, the Bank of Russia said.
        "Generally, rather good conditions of external trade balance and budget, a low level of state debt, an absence of excessive dependence of nonfinancial companies on foreign currency funding, and a substantial stock of international reserves allow Russia to retain rather high immunity to possible imbalance on global financial markets," the bank said.
        The central bank also said that despite the downgrade of Russia's sovereign rating below investment grade in early 2015, the country's treasury bonds, known as OFZs, are still in demand among foreign investors.
        Russian officials have recently been playing down the scale of the economic and financial crisis that hit the oil-dependent economy following its annexation of Crimea from Ukraine. While the central bank report is similar to recent government rhetoric saying the worst of the crisis is over, Russia's economy has slid into recession and is on track to contract by around 3% this year, suffering from double-digit inflation above 15%. The ruble's volatility, among the most notable movements on the global currency market over the past year, also remains a conundrum for Russia's financial system. Its volatility has been killing any investment activity, one of the key economic growth drivers, as the unpredictable exchange rate makes it difficult to do business.
        Herman Gref, the head of Russia's largest lender, Sberbank, said in late March--the period addressed by the central bank in its report--that the worst for the country's banking system was clearly not over and that the bad debt issues would remain for a while.
        Write to Andrey Ostroukh at andrey.ostroukh@wsj.com
        (END) Dow Jones Newswires

        June 23, 2015 05:00 ET (09:00 GMT)

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