Trends of the Monetary System and Financial Markets

DOI:10.21686/tmsfm/3.2017

TRENDS OF THE PLEKHANOV RUSSIAN UNIVERSITY OF MONETARY SYSTEM AND ECONOMICS FINANCIAL MARKETS

Working paper №3 2017

Content: Non-residents Hold onto the Capitals of Russian The Bank of Russia 2 Banks Is Similar to That of Brazil Non-residents have decreased their of this type currently operate in Rus- Too Big To Fail or 3 participation interest in the capital of sia. On top of that, 45 credit organiza- Systemic Banks Got existing Russian banks. At the begin- tions have an authorized capital ex- Under Rehabilitation ning of 2014, the owners of 251 ceeding 1 trillion rubles, which auto- Market Manipulation 4 credit institutions registered in Russia matically implies the universalization is Detected More were non-residents. However, by mid of their operations. Often than the Mis- -2017 the number of such organiza- Table 4 shows the key indicators use of Insider Infor- tions was reduced to 170. of 10-top largest commercial banks - mation Meanwhile, in spite of the interna- fully owned by non-residents - in the The Value of Com- 5 tional sanctions and risks involved in Russian Federation in terms of the panies Reflects the running the banking business in Rus- registered authorized capital. The as- Structure of the sia, foreigners are not rushing to leave sets of this group exceed 2.7 trillion Economy the banking sector altogether. More- rubles, while the total capital is about Cash Turnover Ex- 6 over, the total authorized capital of 450 billion rubles. periments operating credit institutions, in which It is characteristic that in contrast non-residents are present, has grown to most Russian banks, those under The Task of the 7 to 2.5 trillion rubles. (see Fig. 1). full control of foreigners, conduct a Population is to Be- Particularly valuable for non- generally more balanced credit policy lieve in 4% Inflation residents are banks with 100% for- with fewer risks, which positively af- Regarding the Re- 7 eign capital participation - 67 banks fects their overall financial stability. plenishment of Inter- national Reserves to 300 3 000 500 Billion Dollars 250 2 500 Aggregate authorized capital 200 2 000 of operating credit 150 1 500 institutions, bln rub

100 1 000 Number of operating credit 50 500 institutions with the 0 0 participation of non-residents

Fig.1 Indicators characterizing the participation of non-residents in the banking system of the Russian Federation and its total authorized capital. Page 2 Trends of the Monetary System and Financial Markets

The Bank of Russia Is Similar to That of Brazil

The rapid decline in inflation in Bra- zil forced the Central bank of the coun- 15 try to reduce aggressively the official 14 interest rate (see Fig. 2). It is the first 13 time in the 21st century, when such low 12 Brasil inflation can be observed in this Latin 11 10 American country. 9 The synchronization of the dynamics 8 Russia of inflation indicators in Brazil and 7 Russia can be noted (see Fig. 3). Infla- 6 tion below 4 per cent has not previously 5 been recorded in our country either. Consequently, the domestic regulator

will continue its policy of reducing its

01.09.2016 01.10.2016 01.11.2016 01.12.2016 01.01.2017 01.02.2017 01.03.2017 01.04.2017 01.05.2017 01.06.2017 01.07.2017 01.08.2017 01.09.2017 01.10.2017 01.11.2017 01.12.2017 key rate. 01.08.2016 Over the past twelve months, the Fig.2 Official interest rates of the Bank of Russia and the Bank of Brazil. Bank of Brazil has decreased the official interest rate by 6 percentage points, 18 whilst the Bank of Russia - only by 1 16 percentage point. 14 With the current official interest 12 rates together with the inflation below 10 the target level, the actual interest rates 8 6 - adjusted for inflation - have increased 4 significantly in both countries (see Fig. 2 4). However, if for Brazil high interest 0 rates are the norm, in Russia this practice appeared not before than two years ago. The rates are currently at an all Brazil Russia time high since the crisis in 2014. The inflation targeting regime oper- Fig.3 Inflation in Russia and Brazil. ating in the countries in question in- volves a rigid interest policy in the 15 event inflation is above the target level, 10 or vice versa - a soft interest policy in case inflation is below the target. 5 Within this framework, the step of bringing down the rate by 50 basis 0 points is now seen as optimal. At the meeting on 15 September, the -5 Bank of Russia lowered the key rate to -10 8.5 per cent. A less significant step (25 basis points) to reduce the key rate will allow speculators to strengthen the Rus- Brazil Russia sian currency still further, which may adversely affect the replenishment of Fig.4 Real interest rates in Russia and Brazil. the federal budget. Working paper №3 Trends of the Monetary System and Financial Markets Page 3

Too Big To Fail or Systemic Banks Got Under Rehabilitation

In the autumn of 2017, the Bank of Table 1 Russia revoked licenses of seven credit Banks with revoked licences for the last three months institutions. Table 1 represents the credit institutions that were stripped off their Banks with revoked licences, Region of The size of assets, № licences. Sept - Nov 2017 registration bln.rub In view of the unsatisfactory quality Russian International Bank of assets that had not been generating 1. Moscow 15.80 sufficient cash flow, RIB proved unable (RIB) to meet its obligations to creditors in a 2. Arsenal Bank Moscow 0.80 timely manner. 3. TempBank Moscow 7.86 Arsenal Bank did not comply with the 4. International Stock Bank Moscow 3.39 requirements of legislation and regula- 5. Payment clearing house Moscow 0.15 tions in terms of combating the legitimi- 6. Regioninvestbank Moscow 0.86 zation of income - money laundering – 7. Novyj Simvol Moscow 2,08 earned from crime and financing of ter- TOTAL 30.94 rorism. These requirements demand 2 500 50% identifying some information about cli- ents’ illegal actions to mandatory control 2 250 45% and sending reliable information about 2 000 40% them to the authorized body. Meanwhile, 1 750 35% the bank's activity had been largely fo- 1 500 30% cused on carrying out checks on illegal 1 250 25% transfers of money abroad since 2016. 1 000 20% It can be seen from table 1 that the 750 15% total size of assets of the credit institu- 500 10% tions with revoked licenses amounted to 250 5% 30.94 billion rubles. All the banks were 0 0%

participants in the deposit insurance The percentage of non-operating banks out of registered

Июнь 2017

Январь 2006 Январь 2013 Январь 1992 Январь 1999 Апрель 2016 scheme, thus the license revocations are The number of operating banks (left scale) Ноябрь 2016 recognized as insurance coverage. Сентябрь 2015 Following Bank Otkrytie, which is in Fig.5 Operating and non-operating banks in Russia. the 7th place in terms of the size of assets, Binbank was subjected to the reso- privatbank (Binbank Digital), DNB Bank (Binbank Mur- lution procedure. The latter is in the 12th mansk) and Uralprivatbank. place as regards assets. The aggregate Currently, 28 commercial banks are undergoing finan- amount of funds allocated for the resolu- cial recovery procedures. Their total assets reached 8.8 tion of the two banks may exceed 1 tril- trillion rubles, which is 10.6% of the assets of the entire lion rubles. The Bank of Russia is cur- Russian banking system. The outstanding debt of legal rently considering the option of joining entities to the reorganized banks amounts to 42.8% of the Binbank to FC Otkrytie after completing total overdue debt of the banking system. the recovery procedures. In the last quarter, the deposits of the population in One of the possible reasons for the the reorganized banks doubled and reached 1.8 trillion current financial difficulties of Binbank rubles. This was mainly owing to Bank Otkrytie and Bin- may be its aggressive policy of merger bank. According to the preliminary results of the analysis and acquisition in the banking sector. of the financial condition of these banks, the amount nec- Earlier, the bank managed to absorb essary for their financial recovery will be 800-820 billion MDM Bank, Bashinvestbank, Moskom- rubles. Page 4 Trends of the Monetary System and Financial Markets

Market Manipulation is Detected More Often than the Misuse of Insider Information The development of the financial market is accompanied not only by the improvement of its technologies, but also by the emergence of in- 19% creasingly complex unscrupulous practices of its participants.

Initially, the Federal Service of the Financial 55% Markets - and now the Bank of Russia - is en- 26% gaged in identifying and adopting measures to influence violators. The procedure for inspec- tions is regulated by Federal Act no-224 “On Shares Investment units Bonds combating unlawful use of insider information and the manipulation in the financial market ...”. Fig.6 Distribution of identified cases of manipulation in the According to the list published by the mega- financial market by its segments from 2010 to 2017. regulator about the cases of misuse of insider information and market manipulation, only three cases of abuse of internal information have been officially revealed since 2010. The remaining cases are recognised as manipulation of the market. Variants of manipulation have been identified. There are known cases of dissemination of intentional false information in the media, which entailed speculative purchases of securities followed by their collapse. It is rather common to find an artificial increase in the volume of trans- actions in the stock market among a limited number of people with a view to “warming up” Fig.7 Number of canceled qualification certificates of finan- the interest of other market participants in secu- cial market specialists. From 1.01..2017 to 29.09.2017. rities. The artificial warming up of the stock market from time to time produced its results when the regulator needs to more pay attention to this price of the manipulated instrument rose several segment. times within one to three days. It is not difficult One of the results of the Bank of Russia's for manipulators to “channel” the market of low activity is the “cleaning of professional ranks” - liquid instruments in the “right” direction. Not through the cancellation of qualification certifi- surprising that most victims of unscrupulous cates of financial market specialists from per- practices are securities with an insignificant vol- sons recognized as manipulators. In recent ume of trading. years, there was a significant increase in the The bulk of cases of market manipulation number of withdrawn certificates (see Fig. 7). falls on the share market (55%). In the segment In the event of causing significant losses, of mutual investment fund, there were 26% of the materials of the unfair practices in the stock manipulations and 19% in the bond market re- market are transferred to law enforcement spectively (see Fig. 6). agencies with the subsequent initiation of Interestingly, the Bank of Russia practically criminal cases. does not reveal cases of manipulation in the seg- Working paper №3 Trends of the Monetary System and Financial Markets Page 5

The Value of Companies Reflects the Structure of the Economy Table 2 Comparison of the absolute values of The rating of the largest countries in relation to world GDP with the aggregate market companies' capitalization to GDP capitalization of public companies testifies that these indicators roughly correspond Place Country Mark cap/GDP with each other. However, for individual by capitalization by GDP countries their ratios may be very different (see Table 2). Worldwide 1.18 Firstly, this depends on the level of po- Switzerland 2.96 10 19 litical risks. In countries with a stable po- United States 1.66 1 1 litical economy, investors pump into shares Netherlands 1.58 13 18 more actively, in contrast to those with po- Sweden 1.55 18 22 litical instability. Secondly, countries with Canada 1.43 7 10 diversified economies and promising sec- United Kingdom 1.34 4 5 tors attract more investors than others. Australia 1.27 12 14 In Russia, the capitalization of public Japan 1.23 3 3 companies is half of that of the GDP, however, the prospects for it doubling to the China 1.06 2 2 world's average hinges entirely upon com- France 1.02 5 6 modity prices. The closest to the world av- India 0.94 8 7 erage level is the financial sector. Its share Saudi Arabia 0.72 26 20 is made up of 17.8%, which is almost iden- Brazil 0.55 16 9 tical to the share of this sector in the US Indonesia 0.51 25 16 stock market (see Table 3). Meanwhile, the Russia 0.51 20 12 share of both technology and the industry Mexico 0.49 24 15 sectors on the Russian market (3.2%) is Italy 0.37 19 8 less than the similar share of the US (28.4%), China (33.1%) or Sweden Turkey 0.28 35 17 (33.7%). Argentina 0.16 47 21 Nigeria 0.10 58 26

Capitalization of companies by sector of economies Table 3

Worldwide Russia USA China Canada Sweden Financials 24.48% 17.83% 17.31% 26.55% 32.16% 33.50% Technology 12.58% 0.01% 19.31% 17.35% 2.94% 7.30% Industrials 11.79% 3.21% 9.39% 15.84% 9.17% 26.37% Consumer Cyclicals 11.38% 4.86% 11.90% 11.08% 6.57% 13.15% Consumer Non-Cyclicals 8.34% 5.46% 7.71% 5.60% 5.71% 6.73% Healthcare 7.66% 0.08% 11.17% 4.88% 0.97% 3.16% Basic Materials 7.30% 20.86% 3.35% 9.40% 11.87% 4.57% Energy 5.83% 40.05% 6.09% 5.58% 17.66% 1.02%

Telecommunications 3.13% 1.67% 1.89% 0.74% 5.14% 3.79% Services Utilities 3.02% 5.98% 2.84% 2.71% 3.32% 0.04% Page 6 Trends of the monetary system and financial markets

Cash Turnover Experiments 2019 will mark 250 years since the nologies and durability of specimens. issue of the first paper money in Russia. And it is almost 200 years since JSC “Goznak” (State emblem) printed paper money for the first time. Initially, this enterprise was called the Expedition of Storing State Papers and was established under the decree of Emperor Alexander I for the production of the first specially protected paper and for printing paper money with protection against forgery. In 1919, the company was reorganized and was given the name “Goznak”. Fig.8 The advertising banknote of JSC "Goznak". Apart from protective functions against forgery, banknotes must with- stand multiple transfers from hand to Banknotes also need advertising hand, through cash registers and cash The proven ways of protecting graphic products dispensers, serving cash turnover are applied not only to produce banknotes for circu- through the country. For these purposes lation, but also to release so-called “advertising JSC “Goznak” constantly conducts ex- banknotes” (see Fig. 8). periments and studies aimed at increas- The advertising banknotes cannot be considered ing the wear resistance of the material as a payment means. They are designed to demon- from which the banknotes are made of. strate to competitors, partners and potential custom- The results of the experiments and ers the company’s capability for producing special studies are tested on a series of bank- paper with security features for banknotes. These notes, which are considered experimen- unique banknotes are distributed amongst the profes- tal. This is not particularly made public, sional community and exhibitions, are offered to po- but notaphilists identify these on various tential customers during meetings and negotiations, issues, singling them out of the total cash and also find their place in private collections. -money supply and putting them in pri- Advertising banknotes are printed not only by vate collections. Such issues include: Goznak, but also by foreign companies that produce - 10 rubles, modification of 2004 series protected paper products. Figure 9 shows the adver- ФФ ЦЦ; tising banknote of the British company "De La Rue", - 100 rubles, modification of 2004 series who prints cash for many countries in the world. УУ, ФФ, ЦЦ; - 50 and 100 rubles, modification of 2001 series AБ; - 100 rubles, modification of 2001 series AЛ; - 500 rubles, modification of 2001 series aA. After a certain period, the experimen- tal banknotes in circulation are withdrawn and sent for study in the labora- tory of Goznak where specialists analyse them and draw conclusions about the effectiveness of the new protection tech- Fig.9 The advertising banknote of the British company «De La Rue».

Working paper №3 Trends of the Monetary System and Financial Markets Page 7

The Task of the Population is to Believe in 4% Inflation The Bank of Russia has submitted to the State Duma of the Russian Federation the draft of the Monetary Policy Guidelines for the period 2018/2020. The document is usu- ally considered within the framework of the annual budgeting process and should be taken into account by the Duma members. As is similar to the past three years, the targets set in the Document have not been changed: they still aim at maintaining the price level and financial stability of the country. The price level is influenced by the current inflation targeting, whilst the financial stability of the country is retained by The Document notes that both households and taking measures to guarantee the timely pro- businesses still remember the negative impact of vision of liquidity and additional financing significant and unpredictable fluctuations in infla- to banks who would be experiencing finan- tion that they have been faced with several times cial difficulties. in the last quarter of the century. Unfortunately, The regulator has the responsibility of cre- these fluctuations, or rather inflationary spikes, are ating confidence for business prospects by bound to continue in the event of a sharp decline providing the predictability of inflation at in oil prices, and eventually in the exchange rate of the rate of about 4% per annum. Yet for the the Ruble. The population will feel an inflationary majority of the population, it is extremely surge once again, but the Bank of Russia is difficult to build up such confidence, since unlikely to raise the key rate still further, since its they still feel the repercussions of the double current level is exceedingly high. -digit values of the inflation rate. According to Taylor's monetary rule, the key The Bank of Russia continues to target the rate of the Bank of Russia should be around 5%. consumer price index calculated by the Rus- This means that the regulator leaves a margin of sian State Statistics Committee (Rosstat), variation of 3.5 percentage points of the key rate however, its commodity bundle does not because of the negative inflationary expectations match the real structure of consumption of of the population. Regarding the Replenishment of International Reserves to 500 Billion Dollars Next year the Bank of Russia is going to con- The current strengthening of the Russian cur- sider the rise of the level of international re- rency is provided by speculative investors who serves to 500 billion dollars. This will result in are buying up Rubles to earn on interest rate the rejection of the mechanism of free floating swaps. However, since speculation has a short- of the Ruble exchange rate in favour of the next term nature, there is a great risk of a massive modification of the “dirty sailing” (IMF term). outflow of capital from Russia, followed by a Such negative practices of this regime have sharp devaluation of the national currency. been observed repeatedly both in Russia and in Thus, the “speculative dependence” replaces the other developing countries. The Bank of Russia “oil dependence” of the Russian economy and does not disclose the purpose of the targeted the federal budget. accumulation of international reserves to a level World practice has repeatedly argued that significantly exceeding the minimum sufficient even countries with a significant level of for- threshold set by IMF for a freely floating ex- eign exchange reserves but without a developed change rate. economy have a weak national currency.

Working paper №3 Trends of the Monetary System and Financial Markets

Scientific and Research Union of PRUE

Address: 36,Stremyanny lane, Moscow 117997, Russia Scientific Supervisor: DE Sergey Valentey Tel: +7(499) 237-84-87 E-mail: [email protected] Responsible Editor: Denis Domashenko

The Authors:

 Denis Domaschenko www.rea.ru  Irina Guseva  Maksim Markov

 Lazar Badalov

Statistic Data: The Bank of Russia, Thomson Reuters.

E-resource: DOI:10.21686/tmsfm/3.2017