What is ruble liquidity? How does the Central Bank use this tool?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:46

To understand what ruble liquidity is, you need to understand some aspects of the economy. Let's try to trace the path of money, in particular rubles, from companies or enterprises to the Central Bank and vice versa, since all transactions with rubles are somehow tied to the Central Bank of Russia. This happens because the Central Bank is the main creditor of both commercial banks and large companies.

Ruble liquidity of the Central Bank is an instrument of influence on the country's economy

It's no secret that any business can live and develop successfully with the attraction of credit funds. To buy equipment, hire people, organize work, etc., you need a lot of money. Entrepreneurs on a smaller scale are looking for them in commercial banks, and these banks themselves, accordingly, borrow rubles from the Central Bank. Now we can give the first definition of what ruble liquidity is. This is the amount of rubles that the Central Bank has to borrow for various organizations, banks for a limited amount of time.

Thus, the Central Bank can manage the total number of rubles that circulate in the country, and use this parameter to influence some aspects of the economy, primarily the ruble exchange rate. The logic here is simple: the fewer rubles are freely available, the stronger the national currency and vice versa. Based on this, we can answer the question of what ruble liquidity is in a different way: it is an effective instrument of the Central Bank, as the main regulator of the country's economy.

How does the Central Bank use ruble liquidity as an instrument of influence?

Main responsibilities of the Central Bank affected by ruble liquidity:

• ensuring the stability of the national currency,
• keeping inflation at a certain level,
• ensuring the sound functioning of the banking system.

The Central Bank can achieve its goals with various tools, but one of the most effective is the ruble liquidity of the Central Bank. How does it work in practice? The simplest scheme that explains the instrument we are considering: if ruble liquidity decreases, then the ruble strengthens, and vice versa. The Central Bank can redistribute the flow of rubles for certain transactions and vice versa - set limits for others. In particular, there is a limit on ruble liquidity on a currency swap. What is it?

What is a currencyswap and why is it needed?

Currency swap is a refinancing instrument financed by the Bank of Russia. Foreign currency serves as collateral for transactions. A fixed interest rate is set, which is published daily on the Central Bank website (picture below). A currency swap is an urgent exchange operation that is performed by two parties to buy / sell a currency on a spot basis, that is, payment immediately. In fact, two operations are performed: one for the purchase of foreign currency with payment here and now at the current rate, the second for the resale of the same currency after a certain period on forward terms, that is, at a predetermined rate.

History of FX swap operations

Contracts of this type are considered relatively young - for the first time, London bankers began using a currency swap back in 1979. However, only two years later the financial world fully appreciated this tool. The first participants in such transactions were IBM, Salomon Brothers and the World Bank. In Russia, they began to provide liquidity using "currency swap" contracts only in the fall of 2002 and only for exchange transactions with the dollar. Later in 2005 it became possible to make such transactions with the euro.

What is ruble liquidity? Why is it important when making currency swap deals?

Let's look at an example. Let's say company 1 wants to buy equipment for its production in the USA, for this it needs dollars. It would seem an easy way: to borrow dollars from the Central Bank, which allocates a certain amount of rubles daily to buy foreign currency at the current rate, and then buy equipment. For the received (in rubles!) profit, repay the debt on the loan, again at the current rate. But the rate by this time may change significantly and turn out to be extremely unprofitable for the company. Instead, a transaction is made by the type of a currency swap (exchange). This is a kind of insurance for the deal described above.

Now company 1 is looking for company 2, which has dollars but needs our national currency, for example, wants to buy oil. These two companies, either directly or through an intermediary, enter into an agreement that consists of two parts. In the first part, company No. 1 buys dollars from company No. 2 and sells rubles to it at the current rate, which is called here and now. In the second part, both companies agree that after a certain time they will make a reverse exchange operation at a predetermined rate. This is only an approximate scheme, since transactions can be concluded through dealers and brokers, and companies No. 1 and No. 2 may not even be aware of the existence of each other. The bottom line is that none of them will suffer due to changes in the exchange rate in the future. Their losses are limited to the cost of the swap operation, which most often does not exceed 1%, and in some cases can be carried out for free.

To carry out such transactions, money is again taken from the Central Bank, all transactions with which are calculated at the current ruble exchange rate. This is what ruble liquidity is,with its help, the Central Bank can influence the country's economy.