NEWS

Ignatyev Sees Economy Emerging From the Crisis

By Alex Anishyuk

The St. Petersburg Times

MOSCOW — The economy has emerged from crisis, and financial markets have become healthy enough to withdraw some support measures, the Central Bank and the government said Wednesday in a report to the State Duma that touted the effectiveness of their anti-crisis policies.

First Deputy Prime Minister Igor Shuvalov predicted that the economy could return to its precrisis level by 2012. “The sharp phase of the crisis and the most shocking situation is behind us, and we are now saying that the crisis is over. We are saying that we are moving on to the recovery phase,” he said.

Now that the financial markets have recovered, the Central Bank will begin to withdraw its collateral-free loan auctions that it instituted in October after liquidity dried up on debt markets, Central Bank Chairman Sergei Ignatyev said. “In order to exit the crisis, collateral-free lending must be wound up and replaced with other instruments and credit resources,” Ignatyev said.

The amount of collateral-free loans given by the Central Bank reached 1.92 trillion rubles ($62.4 billion) in February before dropping to its current level of 437 billion rubles. Seventy-five banks currently have debt outstanding using this instrument.

“The Central Bank took a large credit risk with the collateral-free loans, but we believe the cost was justified as this measure has helped the Central Bank provide liquidity support to medium-sized banks,” said Elina Ribakova, chief economist at Citibank.

“Now that the systemic liquidity in the banking system appears to have stabilized, we believe it is important to withdraw the extraordinary liquidity support measures such as collateral-free loans,” she said.

If a bank needs emergency liquidity for more than a few months it is likely that it is an issue of insolvency, in which case the bank requires recapitalization rather than liquidity, she said.

“Russian firms are considerably less dependent on short-term loans now than during the recession,” said Mark Rubinstein, an analyst at Metropol IFC. “The figures cited by Ignatyev on collateral-free loans are direct proof of that.”

The Central Bank has also been spurring lending by cutting the rates it charges banks for its credit facilities as well as its target rate for which banks lend to each other. It began lowering its main interest rates in April, bringing the refinancing rate down to 10.5 percent this week from a high of 13 percent.

The bank has also positioned itself as the main source of liquidity for the financial system, supplying loans through a range of credit facilities, including collateral-free loans.

“This has represented the Central Bank’s quantitative easing effort, and, in our view, allowed the authorities to avoid the full-scaled collapse of the financial system last autumn,” Renaissance Capital said in a research note.

One of the next steps in reviving the country’s banking sector, however, is increasing banks’ access to long-term debt, Ignatyev said.

In a bid to increase liquidity in long-term debt markets, Ignatyev proposed ending the limitations on bond issues. The amount of debt a company can issue is currently limited to the size of its equity.

This limit “is clearly unnecessary. I don’t know a single person who would disagree with this, but the issue keeps on being discussed and discussed,” Ignatyev said.

The corporate bond market saw a revival this summer, and Gazprom led the way with an issue of $2.4 billion in eurobonds in July. In August alone, the value of corporate bonds traded on the MICEX rose 32 percent to 1.1 trillion rubles ($35.7 billion).

Besides the collateral-free loans, the other measures outlined by Ignatyev and Shuvalov as key to the economy’s recovery included putting money from the National Welfare Fund on deposit with Vneshekonombank, which the government then used as a bailout vehicle; recapitalizing VEB; placing federal budget funds on bank deposit accounts; and recapitalizing the Deposit Insurance Agency.

These measures have allowed the government to funnel funds directly to the real economy and provide much needed funding for the banking sector.

While the usefulness of some of the tools has come to an end, the Central Bank is asking for an extension on other instruments that it says it needs to continue to prop up the economy.

Ignatyev asked Duma deputies to allow the bank to continue compensating banks for losses sustained from deals with failed banks — an emergency power that he was given last fall.

He also asked for the authority to continue putting caps on the amount of interest that banks are allowed to pay for deposits, in an effort to discourage consumers from investing their money in risky banks.

The report met with a mixed response from deputies. While United Russia members praised the government’s response to the crisis, other parties were not so generous. A Just Russia said the measures were inadequate because the country’s GDP witnessed a steeper fall than any other oil-producing economy. The Communists pointed to low wages throughout the country and the drop-off in manufacturing as evidence that the government was pursuing the wrong policies.

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