Russia needs a more conservative approach towards its reserves, the central bank said on Tuesday, noting risks to financial stability from limited access to foreign capital, tighter US monetary policy and volatile oil prices.
The bank said in its Financial Stability Review that Russia was well hedged against global markets imbalances, but the ruble could weaken and higher capital flight increase if the US Federal Reserve raised rates, Reuters reported.
Russia is sliding into recession this year, hit by sanctions over its role in Ukraine and last year's steep fall in oil prices. The central bank expects the economy to shrink 3.2% this year.
After showing reluctance to use its gold and forex to support the ruble late last year, the bank has pledged to increase its reserves to $500 billion, from $360 billion, over the next few years.
"Russia's specific situation requires a more conservative approach (towards reserves) which should take into consideration the possibility of long-term restrictions to access to foreign markets and the need to cover potential significant capital outflows in the next two-to-three years," the bank said.
Liquidity Injections
The central bank said it would launch foreign exchange liquidity injections and market interventions to prop up the ruble if the risk of higher capital outflow materialized.
It said that the current oil price of between $60 and $65 per barrel was enough to support the federal budget and the creditworthiness of domestic oil companies.
Oil companies, Russia's chief exporters, are in a comfortable position and can weather oil prices as low as $40 per barrel, it added.
In general, the bank said in its report, Russian corporates should have no problem paying off the $65 billion in foreign debt that is due by the end of the year, saying that domestic banks have a foreign exchange buffer of around $43 billion.
It saw a potential foreign currency liquidity shortage among individual banks of no more than $4 billion this year, which could be covered by interbank lending or central bank mechanisms, such as repo operations.
But, corporate overall debt remains very high, the bank said, adding that non-performing loans were growing, especially in construction, machinery and equipment production for agriculture, and retail.
"Given the high debt burden of the corporate sector, deterioration in the quality of companies' loan portfolios will continue," it said.
The bank said non-performing loans could peak later this year or in the first half of 2016 at 16.5-17% and their annual growth rate could come to 9-11%.
It estimated the total external debt of Russia's non-financial institutions at 29.4% of gross domestic product as of Jan. 1.
Capital Outflow
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.
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.
