Monetary supply stagnation as a result of fiscal policy

Monetary supply dynamics (changes in the monetary base in broad definition, reflecting the Bank of Russia operations on the formation of monetary supply) in the last months of the current year can be regarded as stagnant.

Indeed, over the last three months its total volume has decreased by Rb 169bn, i.e., 2%. Compared with the beginning of the year, on November 1 that value was lower nearly by Rb 600bn (6.9%).

Monetary supply dynamics is formed by the three main operations of the Bank of Russia: the operations with reserve assets (in particular, interventions in the domestic market), budget operations (mainly the accumulation of budget balances, including the Reserve Fund and the National Welfare Fund, with the Bank of Russia accounts) and operations to provide liquidity to commercial banks (refinancing of the banking system).

In recent months (August-October), the Bank of Russia foreign currency interventions were minimal and totaled to about $1bn. In addition, in this period the Bank of Russia was selling foreign currency, therefore, the interventions led to a reduction in the monetary base. However, since the beginning of the year foreign currency transactions contribution in the money supply was positive: in January-October the Bank of Russia has purchased $7.7bn, having released in circulation about Rb 230bn. At the expense of other operations with reserve assets (regardless interventions of foreign exchange in the domestic market), the Bank of Russia reserves since the beginning of the year increased by another $13.5bn

Reduction in the monetary supply is due to the sustained budget surplus and the accumulation of excessive (surplus) national revenue with the Bank of Russia. Thus, over the last 10 months of the present year the federal budget surplus amounted to Rb 717bn, but the funds accumulated in the bank accounts of the government have grown much more because of the additional raised funds through the loans in domestic and foreign markets. Only the balances in the accounts of the federal government with the Bank of Russia has made since the beginning of the year more than Rb 2 trillion. With the account of the Subjects of the Russian Federation, the funds of government agencies with the Bank of Russia have increased over ten months by Rb 2.5 trillion. This value is the result of direct deduction from the monetary supply, as those funds were withdrawn from economic circulation.

To compensate for the currency outflow to government accounts, the Bank of Russia has to increase the banking system refinancing. Within ten months the Bank of Russia requirements to credit institutions were increased by Rb1.4 trillion, including Rb 171bn in October 2012.

Thus, at present, the key factor in reducing of monetary supply - "sterilization" of assets in the government accounts with the Bank of Russia. This situation, however, is partly seasonal, as traditionally, in December the value of government spending rises sharply and the previously accumulated funds flow into the economy. However, in this year situation, it is unlikely that all Rb 2.5 trillion will be addressed in a couple of months to the accounts of budget beneficiaries. Rather, the government will again replenish the Reserve Fund. In the last year, the Reserve Fund has been increased by more than Rb1 trillion, which is comparable with the growth of banks refinancing over the same period.

M.Yu. Khromov, Leading Expert, Center for Structural Research