An employee of a Perm printing factory of the Federal State Unitary Enterprise “Goznak” checks a quality of the thermal stencil package.RIA Novosti/Maxim Bogodvid
The Russian Central Bank is readying to inject one trillion rubles ($15 billion) in banknotes into circulation in December, to cover a seasonal demand for cash.
Georgy Luntovsky, the Central regulator’s first deputy chairman, made the announcement about the forthcoming liquidity issue on November 12. According to the bank’s data, the amount of cash in circulation in Russia exceeded 7.7 trillion rubles ($115.7 billion) on 1st October.
Elvira Nabiullina, head of the Bank of Russia, said the decision was taken because of growth in demand for cash that typically occurs at the end of the year.
Where does the shortage of cash come from?
According to Central Bank statistics, the volume of cash in open circulation grows annually in December and then falls again at the beginning of a new year. In December 2014, the amount of cash in circulation increased by 914 billion rubles ($13.7 billion) to 8.8 trillion rubles ($132.3 billion) while, by the end of January 2015, it fell to 7.7 trillion ($115.7 billion).
"Usually in December, the budget spends up to 40 percent," said Vladimir Tikhomirov, an economist with the BKS Financial Group, who attributes the increase in cash to a growth of budgetary spending. Also, people begin to withdraw money from accounts more actively in anticipation of the holidays.
"The further reduction of the ruble mass can be explained by capital outflows, the transfer of rubles to the currency and the transfer to accounts," explained Sergei Grigoryan, head of the analytical department of the Association of Russian Banks (ARB).
What will the issuance influence?
According to Nabiullina, the issuance will not lead "to any other effects" associated with monetary figures, as the regulator plans to take into account the parameters of the demand for cash. Earlier, the press service of the Central Bank said that the regulator was “not talking about an increase in the money supply" (the total amount of money in the economy, both in cash and non-cash form – RIR).
However, analysts believe that this is impossible.
"To print more money and put it into circulation, while not increasing the money supply, is possible only if to withdraw part of the notes at the same time, such as the old ones. But the Central Bank's report does not talk about this," said Grigoryan.
"This is most likely about the replacement of one trillion bank deposits for cash," said Vasily Solodkov, director of the Banking Institute at the Higher School of Economics in Moscow.
As economist Sergei Alexashenko points out, the "concept of 'printing money' or of 'increasing issuance' in relation to the Bank of Russia has a figurative meaning.”
According to him, the Central Bank always issues non-cash money first, which is allocated to bank accounts, and then banks exchange non-cash money for cash.
Grigoryan notes that the increase in money supply (M2 is the denotation used by the Central Bank) could be beneficial for the Russian economy.
"The more money, the stronger the economy, while in Russia, the ratio of M2 to GDP is extremely low," he said.
The money supply equals almost half of GDP: 32 trillion rubles ($481 billion) against 70.9 trillion ($1.066 trillion) as of the beginning of the year. In comparison, in China, on the contrary, the money supply is twice the country’s GDP.
"The Central Bank fears increasing the money supply, believing that it will accelerate inflation. However, studies by the ARB (the Association of Russian Banks) have shown that in Russia, inflation is not monetary, it depends on the tariffs of natural monopolies," said Grigoryan.
Easing the strain on Russia’s banks?
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