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the budget deficit to grow and thereby influencing banking liabilities. Meanwhile, the Central Bank has no mechanism to control government spending — nor the rate at which it borrows.
Money received from the Central Bank when state-owned banks purchased OFZs is essentially just a substitute for budget funds. This becomes a liability for the bank, which is replaced and returned to the Central Bank when budget expenditures are made.
However, one way or another, monetary emission is already happening. It started as soon as the government decided to increase spending beyond what it receives in revenue. Does this mean inflation in the real economy is destined to accelerate? Not necessarily — as long as the government borrows at market rates and the Central Bank keeps those rates high.
The government’s debt-servicing costs depend on interest rates. Four fifths of the Russian domestic public debt (about RUB15 trillions) are liabilities at floating rates linked in some way to the Central Bank base rate. These include OFZs with floating coupons, preferential mortgages and preferential corporate loans under government programs. This means each rate increase has an impact.
While the Central Bank’s rate remains relatively high, it limits the flow of credit from banks into the real economy. Remember, that there is a direct link between rising state expenditure and increased interest rates.
At present, there is no expectation of monetary policy easing: at its last meeting, Russia’s Central Bank held the rate at 7.5%. The bank’s prognosis for inflation in 2023 is between 5% and 7%, despite the fact that, by spring, price growth is expected to drop below 4%.
Traditional notions of “printing money” are largely outdated. In modern economics, central banks only create money within the financial sector. Meanwhile, money in the real economy is created by banks via credit — and by the government via a budget deficit. If the Russian economy was really making a steady recovery, the government wouldn’t have to increase the budget deficit so rapidly. Monetary emission in a modern economy also indicates that a central bank has lost its independence. Russia’s Central Bank has not reached that stage. But, this year, the rapidly expanding budget deficit means it will be much harder for the Central Bank to continue fighting inflation: revenues are not keeping pace (and under Western sanctions, they cannot keep up) with expenses driven by the war in Ukraine.
This article first appeared in The Bell here.
21 RUSSIA Country Report Russia April 2023 www.intellinews.com