Page 69 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
Bank sector liquidity
As equities are the only asset in Russia that are earning positive real returns, Russian banks are big players in the equity market and consequently the liquidity in the banking sector has a dramatic effect on the performance of the equity market.
The interbank market has been hit several times by turmoil in recent years. The mini-banking crisis in 2004 saw the interbank market stall after big banks cut off small banks, fearing a round of closures and collapses, and only recovered slowly in 2005.
Then the interbank market was hit by another bout of volatility in the second half of 2006 as a result of the unstable capital flows. Declining oil prices in the third quarter of 2006 stimulated ruble depreciation and hit the ruble liquidity of Russian banks. Total liquidity in banks declined to US$29.3bn in this period from the high of US$36.3bn reported in August 2006.
The interesting point is that, despite the liquidity increase as of end-November 2006, the tense liquidity situation on the local interbank market persisted until December and overnight rates did not decline to 4% until 5 December. They remained above this level in January 2007 despite the usual jump in liquidity in the second half of December.
These swings in bank liquidity were reflected in the equity market, which suddenly surged at the end of 2006 as the liquidity suddenly increased to set a new all time high of 1,921 on the last day of trading on 29 December 2006. The rise and fall of excess bank reserves are shown in Figure 3.11.
Figure 3.11: Russian banks - excess reserves, 2003 - 07 (RUB bn)
RUB bn
1,000 900 800 700 600 500 400 300 200 100 0
Total excess reserves
Total excess reserves, 12month average
2003 2004
2005 2006
2007 2008
*defined as balances of bank’s NOSTRO accounts at the CBR and time deposits of the CBR
Source: CBR, Deutsche Bank research estimates
The tax schedule
As Russian banks have few tools with which to manage their liquidity, the tax schedule is clearly reflected in the liquidity of the bank system. Most companies defer tax payments at the end of the year for tax reasons and so liquidity piles up in the banks, which in turn invest this excess cash in equities.
The sharp sell-off in the first week of January 2007, where the market lost 15% in the first days of trading, was partly driven by bad news from the US and on the oil markets, but also because of the release of this fiscal overhang that sucked liquidity out of the banking sector.
Also, a fall in oil prices usually hits the bank sector about three months later, as it takes this long for the effect of falling prices to work its way through the oil sector production and delivery schedules before cash starts to dry up in the bank sector. At the same time, lower oil prices mean less pressure on the ruble and fewer interventions by the CBR on the forex markets, which also reduces liquidity.
The tax schedule, then, is an important driver of the performance of the RTS and is given in Table 3.22.
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