Picking apart the trends in interest

In late October, Russia’s Central Bank (CBR) dropped its discount rate to a record low of 9.5pc, slashing it by another 50 basis points to 9pc at the end of November.

These measures would have no significant impact had the discount rate not finally assumed the role it is supposed to play in developed economies – the regulation of the value of money.

Despite the latest cuts, Russia’s discount rate remains the highest among G20 nations. Yet Russia has shown impressive progress: over the past 15 years, having survived a number of domestic and international crises, the CBR lowered the discount rate by more than 23 times.

Until recently, however, the discount rate did not fulfil its main function, failing to affect borrowing costs for banks and industrial producers and largely focused on control over interest rates in the retail sector.

In Russia, interest paid on retail deposits is tax exempt provided interest does not exceed the discount rate plus 5pc. Otherwise, the difference between the interest rate and the established maximum is subject to a 35pc tax rate. The situation with retail loans is similar, but in this case banks pay tax if the interest they charge is lower than the discount rate. So Russian banks were unable to introduce a grace period for credit cards. This only became possible after an amendment to the tax code.

It was only recently, largely due to the global financial crisis, that the discount rate began to regulate the value of money. In the summer of 2008, the CBR began to expand the list of securities acceptable as collateral for bank loans. Initially, the list included only low-yield government securities. This blocked the refinancing mechanism, as unattractive government securities were shunned by banks. As the crisis deepened, however, the list expanded, and many banks now have securities that can be used as collateral for a loan.

This scheme took some time to come into effect: the discount rate was still unable to perform its role at the height of the crisis last autumn. While the US Federal Reserve System and the European Central Bank were trimming their interest rates, the CBR raised its discount rate from 11 to 12pc on November 12, 2008, adding one percentage point on December 1, to 13pc.

At the same time, the bank was pumping cash into the ailing banking sector, lending 500bn roubles to Sberbank and 450bn roubles to Vnesheconombank. Both loans were issued far below the discount rate. Sberbank and Vnesheconombank then redistributed the assets among commercial banks.

Even now, the CBR lends at the discount rate and most loans issued are short-term. Russian banks in need of cash can borrow for a short time. Borrowing for longer terms – to finance mortgages or industrial loans – remains problematic. This means that the latest reduction of the discount rate will not directly impact corporate or retail loans. In the future, a viable refinancing system might give banks security, allowing them to lend more freely.

Maxim Builov is a special correspondent for Kommersant Daily magazine.

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