Russian banks began to pay extra for the placement of dollars on the market

it became more expensive for banks to exchange dollars for rubles than direct loans in rubles. Experts interviewed by RBC believe that this atypical situation is caused by an excess of currency that is not in demand,

In May, the conditions for placing dollars on the domestic market changed for Russian banks, according to the data of the Moscow Exchange. Rates on one-day swap transactions in dollars have become higher than the main ruble benchmark - the RUONIA rate (reflects the cost of unsecured interbank overnight loans, that is, the cost of money for banks in the short-term market). The difference between the two indicators, or the DOLLAR overnight basis, has been negative for eight trading days since April 29, RBC calculated. In three of them it was close or went beyond 100 bp.

Such an expansion of the spread is a “unique situation”, nothing like this has been observed on the Russian market for about ten years, since 2011-2012, the profile PRO bonds TELEGRAM channel indicated. Experts interviewed by RBC also call the situation atypical.

On average, since the end of April, the spread between RUONIA and the implied ruble rate on dollar swaps has been at the level of about minus 40 bp, on some days it reaches almost minus 80 bp, the Bank of RUSSIA estimated, calling the difference “insignificant”. “Currently, the financial system and economy are being adjusted to the new conditions,” a Central Bank representative said in response to a question from RBC whether the situation could be considered atypical.

Where do banks get excess dollars

The added difference means that banks are ready to pay extra for the exchange of dollars for rubles compared to the interbank rate for rubles, says Dmitry Polevoy, Investment DIRECTOR of Loko-Invest. According to the analyst, the reason lies in the excess of foreign exchange liquidity in the system as a whole or among individual players.

Sophia Donets, chief economist for Russia and the CIS at Renaissance Capital, believes that it is not entirely correct to talk about "surcharges" for banks for placing dollars on the domestic market. “This is an imputed rate: when it is calculated, the dollar rate is taken equal to the external dollar rate and the ruble rate is counted back from it. The domestic dollar rate is [now] lower than the foreign dollar rate, which is normal, because the Russian financial market is now not fully connected to the external market,” she notes.

Analysts interviewed by RBC cite several factors that led to the creation of a dollar “overhang” in the domestic market and a change in the situation with rates. All of them are a consequence of sanctions against Russia.

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After the start of the Russian military operation in Ukraine at the end of February, Western countries imposed tough sanctions against large Russian banks, providing for some players a ban on any transactions with the dollar, euro and British pound. In addition, there are now restrictions on the movement of capital in Russia - prohibitions have been introduced for non-residents on withdrawing funds abroad from bank and brokerage accounts, exporters have been ordered to sell 80% of foreign exchange earnings (on May 23, the Ministry of Finance decided to lower the threshold to 50%), and households and businesses can receive cash foreign currency only within the limits.

In Russia, the requirement for the mandatory sale of foreign exchange earnings has been relaxed Economics

“The surplus was formed due to the fact that customers receive currency from exports and place it in banks, and the demand for currency in the current conditions is low both from importers and as part of the decline in investment projects,” says the HEAD of the Banking and Financial Markets Analysis Department at Promsvyazbank Ilya Ilyin. According to him, the situation is aggravated by the increase by the Bank of Russia of the rate of deductions to the fund of required reserves for foreign exchange obligations. Market participants also cannot promptly place foreign currency balances on correspondent accounts [abroad] due to restrictions on the movement of capital, adds Vladimir Evstifeev, head of the analytical department of Zenit Bank. Banks cannot actively lend in foreign currency, placements abroad are limited, which means that there are no channels to “collapse the arbitrage opportunities” of market participants, states Polevoy: “And there are two options: to sell the currency simply to the market, this is partly happening, and therefore you see such a strengthening of the ruble, and the second option is to swap these dollars for rubles and then do something with the rubles.” The Bank of Russia, commenting on the situation with banks' liquidity in April, pointed out that "the negative profitability of the imputed dollar rate is primarily due to sanctions restrictions" (.pdf). The regulator highlights the bansthe United States and the European Union for the import of cash dollars and euros into Russia and the blocking of foreign currency accounts of Russian banks.

Do Russian banks have a lot of currency

The foreign exchange liabilities of Russian banks are formed mainly at the expense of client funds - as of February 1, 2022, they had $174.9 billion attracted from corporations and $90.6 billion placed on accounts and deposits of citizens. The credit portfolio of banks in foreign currency on the same date was $166.5 billion rubles, another $53.9 billion rubles. was issued in the form of loans to other banks, and $26.5 billion was kept in foreign currency correspondent accounts with other credit institutions.

As of February 1, the Central Bank estimated the volume of liquid assets of credit institutions at $53 billion, which was higher than the average levels of 2021 (.pdf). Since March, the regulator has not disclosed data on the main indicators of the banking sector by currency.

In 2022, the Central Bank predicts a record current account surplus of $145 billion, but “the situation is unfavorable,” Central Bank Chairman Elvira Nabiullina said at the end of April. She explained that the sharp increase in the indicator is due to the fact that imports in Russia are declining much faster than exports. According to the results of four months, the current account surplus reached $95.8 billion; in April, the increase in the indicator was a record since 1994.

Nabiullina said that the ruble exchange rate should remain free-floating

Does the situation create risks for banks

The actual negative rates for the placement of dollars in the domestic market are uncomfortable for banks, because in one way or another they reduce the margins of the business, says RBC's source in a large credit institution. He does not consider the situation critical, but acknowledges that players will pass these costs on to customers - for example, introduce fees for servicing dollar accounts and deposits.

“Russian banks cannot yet introduce the practice of negative rates for clients (by law they are required to pay interest on deposits to clients. -). As a result, this may be reflected in the growth of commissions for servicing foreign currency accounts, ”Ilyin agrees.

How banks compensate losses from euro deposits Pro

Rising costs are not the only possible problem for market participants. “Risks for banks depend on their currency position — this factor takes into account the overall balance of active-passive operations in foreign currency,” emphasizes Valery Piven, Senior Director of the Financial Institutions Ratings Group at ACRA. He recalls that banks can use currency swaps not only for trading operations and earning on them, but also for hedging currency risks on open currency positions (OCP). In March, the Bank of Russia gave market participants easing on ORP, and in May expanded them.

“If earlier such periods could be used as investment opportunities, realizing that this situation is temporary, now the possibilities to correct this situation are limited,” notes Polevoy. According to the analyst, this is only possible if the imbalance between demand and supply of currency in the market decreases.

“The situation will normalize if restrictions are lifted and importers resume their activity in the domestic foreign exchange market. Until then, short-term dollar rates are likely to remain unattractive for banks,” Evstifeev concludes.

The situation is not so bad if we remember that banks and companies are now limited in attracting foreign currency borrowings abroad, says Donets. “The influx of foreign currency on trading operations, together with capital restrictions, completely removes the risks of a shortage of foreign exchange liquidity, which many feared at the beginning of the crisis,” she recalls.

The Bank of Russia also highlights the positive consequences of negative rates in dollars. “The favorable situation with foreign exchange liquidity creates a buffer for banks in case of possible outflows,” a representative of the regulator told RBC.