A tumbler propped up with a brick – Newspaper Kommersant No. 224 (7425) dated 12/02/2022

Compared to the indicators as of mid-February 2022, the Bank of Russia’s assessment of financial stability risks, the review of which for the second and third quarters was published by the Central Bank, decreased by November, and only the indicators of risks associated with OFZ yields and short-term loans are now higher than pre-crisis levels. Uncertainty related to the future of financial markets remains high – but with the development within the predicted limits of existing trends, as follows from the review of the Central Bank, there is little threat to the financial stability of the Russian markets.

The “Financial Stability Review” of the Bank of Russia for the second and third quarters of 2022, published by the Central Bank yesterday, for all its formality and dryness, cannot be underestimated: this is a report created in an internationally recognized format on the dynamics of financial stability indicators in the Russian markets during one of the strongest shocks in their history, and the only one during the period of Russia’s involvement in direct hostilities, followed by sanctions without precedent in the world in terms of severity from the economies that obviously make up more than 50% of world GDP and more than 60% of Russia’s foreign trade turnover. The official conclusion of the Central Bank based on the results of the assessments: in general, at the moment, at least according to formalized criteria, the stability of the financial markets in the Russian Federation does not fundamentally differ from the situation before February 24, the date of the start of the military operation in Ukraine, and in a number of parameters it is higher. Considering that in March 2022 all indicators on the financial market risk map, except for the indicator related to restructured corporate loans, were estimated at 100 points on a scale of 100, the complete de facto stabilization of the markets in half a year is an unexpected result.

Of course, the review does not discuss the appropriateness of the main tool for managing risks – a partial bilateral freezing of the capital account by presidential decrees, sanctions restrictions and blocking of settlements by the US, EU and other major economies. The scale of the “recovery” of the volume of risks in one scenario or another of the cancellation of these decisions, the Central Bank does not evaluate for the same reason – the restrictions are bilateral. Nevertheless, in essence, the review is an assessment of the effectiveness (including redundancy) of the regulatory actions of the Bank of Russia in the spring and summer of 2022. The Central Bank states that its actions have stabilized the markets in fact in a “perfect storm” without significant losses. Ksenia Yudaeva, First Deputy Chairman of the Bank of Russia, confirmed yesterday at a press conference the assessment of the potential need for additional capitalization by the banking system following the results of realized risks, to the maximum of 0.7 trillion rubles, less than 0.5% of GDP: for a shock of this magnitude, given the prospects for long-term preservation of restrictions on capital this is less than any estimates given. The answer to the question of whether the actions of the Bank of Russia changed the potential losses in the hypothetical future is apparently practically impossible. In this case, the Central Bank is responsible for preventing losses from short-term risks for the financial system, but not for long-term development prospects for both it and the Russian economy as a whole: the future context of this development is unknown.

In the short term, the Bank of Russia states a further increase in the likelihood of a global recession and a change in the nature of its impact on the financial system of the Russian Federation. Thus, “exposure to risks associated with friendly countries … has increased given Russia’s reorientation to their markets and the use of their currencies in settlements”: now about 50% of foreign trade settlements are carried out outside the dollar and euro (they are being replaced by the yuan and ruble). However, compared to the “pre-war” situation in February 2022, only two types of risks have moderately increased: those associated with public debt (growth in OFZ yields) and, to a lesser extent, short-term risks through the interest rate channel. At the same time, the uncertainty for the markets, which is quite difficult to compare with the risks themselves, which the Bank of Russia constantly recognizes, has additionally increased in 2022 – but de facto the Central Bank is now more concerned about the prospects for “infection” of the Russian economy in the scenario of the global financial crisis than an internal crisis, the likelihood of which so far at least not higher than at the end of 2021.

Dmitry Butrin