Troika’s Gavrilenkov criticises Russia’s Finance Ministry action

Russia’s Finance Ministry is pressing on with its borrowing programme, even though the fiscal surplus in August widened dramatically.

Evgeny Gavrilenkov, chief economist at Troika Dialog, believes this behavior “cannot be justified, as it substantially distorts the ruble and foreign exchange markets.”

He explains: “By borrowing too much domestically, the ministry elevates interest rates and forces private borrowers onto foreign markets, encouraging them to take unnecessary forex risk. In addition, the government remains a major contributor to capital outflow as money borrowed on the domestic market is converted into foreign cash and put into the reserve fund.”

At the same time, the Ministry has been increasing liquidity injections by offering deposits to commercial banks. The only explanation for such “confusing activity” is that “the Finance Ministry is obsessed with mobilizing as much reserves as possible at any cost to be ready for any crisis, whether it comes or not,” Gavrilenkov says.

Troika is critical of this activity, since it is causing Russia’s Central Bank to undertake inflationary measures, such as refinancing of commercial banks, to counterbalance the liquidity absorptions and to keep the local rates at a reasonable level.

“In turn, the weaker ruble increases oil and gas revenues for the federal budget, so the surplus widens, implying greater liquidity absorption and a greater need for refinancing from the Central Bank. It is yet to be seen when this vicious circle will be broken,” says Gavrilenkov.

In Troika view, further action from the Finance Ministry and the degree of respective “quantitative easing” carried out by the Central Bank will determine the inflation outlook for the coming year.

Gavrilenkov’s view is that the Central Bank should not hike interest rates, because this is only going to create further inflationary pressures.

He says: “The effect [of a rate hike] would be similar to that seen in 2009 – amid the massive expansion of unsecured Central Bank lending to banks, cumulative inflation reached 5.5% in 1Q09 but stood at 8.8% for the full year.”

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