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9 Oct, 2008 14:45

Government liquidity injections a balancing act

The money being pumped into the banking system is giving rise to concerns about the impact on Russia’s reserves, and the effect on Russia’s notorious inflation problem.

But it will also keep projects moving, which could otherwise be starved of cash, and it may provide an opportunity to bring inflation under control, while keeping GDP growth up.

The Russian government is pumping money into the banking system, not just for the sake of the banks balance sheets – but so they can continue to provide the corporate refinancing vital for Russia’s economic development. 

More than $180 Billion dollars worth of injections means that money availability shouldn’t be an issue. Now all the banks need to do is actually lend it, according to Tom Mundy, Equity Strategist at Renaissance Capital.

“The Russian authorities have acted well and created a situation where there is a huge provision of liquidity.  Liquidity isn’t an issue, intermediation is an issue, they can t do much more. Confidence has to come back.”

With corporate refinancing rates at all time highs, and confidence in the system low, the real economy is starting to suffer from a lack of funding.

Russia's third largest copper maker, Russian Copper Company, has put all new projects on hold, with Truck producer Kamaz cutting production to a 4 day working week. And funding is beginning to affect a range of sectors from agriculture to property development.

However this could have an upside, in that it provides an opportunity to tame Russia’s runaway inflation.  Anatoly Aksakov, Head of the Associated of Regional Banks, says to do this the government needs to carefully balance GDP growth with government spending.

“The government should watch after inflation and therefore not increase government spending. Next year planned government spending growth is at 30% and growth of GDP around 5%.”

With oil prices also falling, budget revenues are also starting to shrink.  Russia’s reserves, the worlds 3rd largest, have been falling with the additional outlays the government has recently been taking on. 

But if the government can ensure that business isn’t suffering from a lack of capital, while bringing inflation under control, and maintaining budget discipline. The drop in reserves could be money well spent.