Page 20 - RusRPTApr23

The Finance Ministry placed RUB3.1 trillions’ worth of bonds last year. Almost half — RUB1.44 trillions — were issued in December. The main purchasers of these OFZs were big banks. Before the war, government bonds were also in demand among non-residents (in 2020, 35% of OFZs were sold to foreign investors) — but now they no longer have any presence in this market.
Finance Minister Anton Siluanov has said about RUB2 trillions were sold from the NWF. In previous years, transactions with the NWF were mirrored by currency operations on the domestic market: if the ministry sold currency from the fund, the Central Bank purchased an equivalent amount (meaning the overall macroeconomic impact was neutral). Since part of its reserves were frozen last year, the Central Bank could no longer mirror the ministry’s operations in dollars and euros. But the authorities returned to mirroring in January 2023 after implementing the new version of the budget rule.
Both domestic borrowing and NWF expenditure represent an increase in the money supply. That poses inflation risks, according to analysts from SberCIB. The Central Bank has said that the M2 money supply total (the sum of cash in circulation plus what is held on accounts) last year increased 24%. This literally means there is more money in the economy.
In its recent publication, Deutsche Bank analysts described this as “printing money.” And, at the end of last month, rating agency Moody’s wrote in its Russia forecast that it feared the government would have to adopt “unorthodox methods,” including “monetary financing” of the budget deficit — in other words, printing new money.
But is this really the case? Yes and no. While the amount of money in the economy is increasing due to decisions by the Finance Ministry and the Central Bank, the “printing press” has not been switched on. To understand what’s happening, it’s important to remember the nuances of Russia’s monetary system — and modern monetary systems in general.
How does the monetary system work?In modern monetary systems, there are two types of money: Central Bank money, which is also the money in the financial sector. This is the cash in the correspondent accounts of banks held at the Central Bank — in effect the Central Bank’s obligations towards the entire banking system. This never enters the wider economy and exists exclusively between the Central Bank and those banks to which it extends credit.
Money in the real economy. This is created when banks make loans or acquire assets. It is also created by the government when it spends more than it collects in taxes. The simplest example is the issuance of a loan by a bank.
An increase in the Central Bank’s money supply does not necessarily lead to inflation. For example, when the Central Bank redeems state debt (how quantitative easing works) it simply replaces government debt (long duration) with Central Bank debt (short duration). All transactions take place using funds from the financial sector and the real economy is unaffected.
However, increasing the money supply in the real economy is a factor in inflation. In our case, the government creates new money supply by allowing
20 RUSSIA Country Report Russia April 2023 www.intellinews.com