Block 4
Information for study
The Central Bank of the Russian Federation
The Central Bank of the Russian Federation (CBR) is one of the few central banks in the former communist countries of Europe that does not claim to have been set up exactly like the German Bundesbank. This is just as well, because it has more formal responsibilities and powers than the Bundesbank under the constitution and under the (revised) central-bank law of April 1995. This may not be a good thing.
Unlike the Bundesbank, the CBR is constitutionally independent. Article 75 of the constitution passed in December 1993 and reproduced in full below states that:
1. The monetary unit in the Russian Federation shall be the Rouble. Issuance of money shall be carried out exclusively by the Central Bank of the Russian Federation. *The introduction and issue of other money in the Russian Federation shall not be allowed.
2. Protecting and ensuring the stability of the rouble shall be the principal function of the Central Bank of the Russian Federation, which it shall discharge independently from other bodies of state authority.
3. A system of taxes to be collected for the federal budget and the general principles of taxation and levies in the Russian Federation, shall be established by federal law.
4. State loans shall be issued in the manner specified in federal law and shall be accepted on a voluntary basis.
*The central-bank law was adopted in 1992, but amended a number of times since, most recently in April 1995. Under the law, the candidate for the post of CBR governor is proposed by the president and confirmed or rejected by the Duma. The governor then proposes the twelve members of the board of directors to the Duma. The governor and members of the board of directors have tenure for four years. This tenure is secured by considerable, but not foolproof, protection from outside interference. The CBR and the government are legally obliged to consult each other about their areas of responsibilities for the purpose of co-ordination only. The relationship is symmetrical in law. The CBR makes a report to the Duma on monetary conditions, but does not receive instructions from the Duma or any other body. The CBR is statutoryly - but not constitutionally - prohibited from monetary financing of the budget deficit. This definition does not prevent the CBR indirectly financing the budget by buying government securities in the secondary market.
The CBR is uniquely responsible for:
monetary policy,
banking supervision,
inter-bank settlement; and is
banker to the federal government.
It shares responsibilities for:
holding (the bulk of) FX reserves, with the government;
the exchange-rate targets and regime, with the government;
the securities supervision of banks, with the Federal Securities Commission.
The government is formally responsible for exchange-rate policy and the CBR for implementation. The government has tended to share the lead on policy with the CBR, probably because there has been a high degree of convergence in thinking between the two organisations, eg, on the introduction of (and later modifications to) the rouble corridor.
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Feb-95 Jun-95 Oct-95 Feb-96 Jul-96 Nov-96 Mar-97 Jul-97 Dec-97
Source: Reuters and Russian European Centre For Economic Policy
In practice, central-bank independence does not derive exclusively from the law; there is also popular and elite support for the notion. Furthermore, a plethora of responsibilities can:
blur the institution's 'focus';
lead to potential conflicts
o between instruments and targets,
o with the government over exchange-rate policy and implementation, and
o with the Federal Securities Commission over the supervision of the banks' securities operations;
enhance the scope for policy and administration errors which cross-contaminate and impair the institution's prestige.
The CBR's independence is yet to be fully tested. So far, the picture is open.
*The executive, acting in union with the Duma, passed a law forcing the CBR to hand over RUR5trn (USDIbn) to the budget in June 1996. This was the first time the CBR's independence had been challenged in this way; the CBR appealed to the Constitutional Court in early July to review the law in the light of Article 2 of the 'central-bank law', under which 'the Bank of Russia is fully empowered to own and control its property and taking away property without its consent is not allowed', according to a Western law firm in Moscow. The CBR and the government eventually came to an arrangement that established the precise legal rules for the transfer of CBR profits to the government. This seems to be broadly in line with the arrangements in western European countries.
The CBR seems to identify fighting inflation as its prime task and stabilising the RUR as a means of achieving low inflation. If inflation started to rise, rather than fall in line with the IMF and budget targets, it is unclear whether the CBR would raise rates and allow the RUR to appreciate. Such a difficult choice might be delayed for some years - that is, until economic recovery has gathered sufficient momentum to provoke overheating.
The government has formal responsibility over the exchange-rate regime and targets and has been working in harmony with the CBR on the design and implementation of policy. However, the government could frustrate the CBR's actions in, for example, fighting inflation if it chose to impose a faster rate of RUR depreciation or a devaluation, or prevent an interest-rate rise by, eg, changing the parameters of the corridor.
Open-market Operations
*The CBR conducts open-market operations and has now acquired a large portfolio of federal securities. This constitutes indirect lending to the government; direct lending is prohibited. The IMF puts limits on this indirect lending, but there is nothing in domestic legislation, which regulates this practice. Last year, the CBR kept its stock of lending to the finance ministry unchanged and, therefore, provided no direct financing on the margin to the government. However, the CBR acquired RUR23trn of securities -almost certainly government rouble securities such as T-bills -taking holdings to nearly RUR59trn. Some of this acquisition of securities could reflect the exchange of new finance-ministry securities in cancellation of part of the finance-ministry's historic debt to the CBR. This suggests the CBR could hold as much as 25% of the stock of RUR237trn of GKOs and OFZs issued at end-1996 and is a major player on the primary and secondary markets in government securities. As the government's banker, it would presumably be obliged to strive to meet the objectives of its client with respect to the quantity and cost of the securities the government issues and to secondary-market conditions.
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Central Bank of the Russian Federation
Note: The CPI rose by 20% from December 1995 to November 1996.
Monetary and Exchange-Rate Policy
Central-bank Policy
The primary responsibility of the Central Bank of Russia is the stability of the currency:
'Protecting and ensuring the stability of the rouble shall be the principal function of the Central Bank of the Russian Federation, which it shall discharge independently from other bodies of state authority. (Article 75 of the constitution passed in December 1993.)
*The CBR's monetary policy is also determined by its obligations as a co-signatory to the CBR/government memorandum on monetary, financial and economic policies to the IMF in relation to the extended financing facility agreed by the IMF in March 1996 and in April 1997. Following most countries' lead, Russia has not published its agreements with the IMF, although it (but not the IMF) is free to do so. We believe the agreement includes upper limits on CBR credits (including indirect credits through secondary-market purchases of government securities) made to the government and on CBR net domestic assets (which are equivalent to loans to the domestic sector). These ceilings have the ultimate aim, according to IMF models, of reining in inflation by controlling the extension of credit and broad-money creation. The ceiling on CBR credits to the government should be consistent with the government's fiscal policy as agreed with the IMF. We believe there are also other limits, eg, a ceiling on the budget deficit and a floor on budget revenues. This would normally be within the context of targets (but not contractual obligations) for inflation and understandings about the exchange rate.
Vocabulare Notes
1. unlike Bundesbank .
2. secondary market .
3. banking Supervision .
4. interbank settlement .
5. exchange rote policy .
6. monetary policy .
