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The Russian Financial Markets

Teodora Trufea, group II,
Master in Management of International Business
The Bucharest Academy of Economic Studies


Introduction .............................................................................................................. 2
Money market .......................................................................................................... 3
Capital market .......................................................................................................... 4
Equity market ........................................................................................................... 5
Banking sector and other financial intermediaries .............................................. 5
Central Bank’s objectives and instruments........................................................... 8
Environment ............................................................................................................. 9
Exchange rate policy ................................................................................................ 9
Monetary policy and liquidity...............................................................................10
Conclusions .............................................................................................................11
Bibliography ...........................................................................................................11


Over the years, the foreign exchange market in Russia has reflected the general development of
the Russian economy and its increasing participation in the world economy, though the Russian
financial markets are considered small for an economy the size of Russia, and in many respects

In 1989, the Soviet Union introduced flexibility in exchange rates, with the allocation of foreign
exchange being done through auctions. The next step was in 1991, the creation, by the Central
Bank of Russia of the first currency exchange in the country, named afterwards, the Moscow
Interbank Currency Exchange (MICEX). This was the established entity to carry out all foreign
currency trading in Russia.

The Russian foreign exchange market underwent major changes with price liberalizations in
1992, and as a result of that the ruble became a genuine and important currency.

The Russian ruble became has become convertible in 2006 when the remaining restrictions on
cross-border transfers were abolished. The Central Bank of Russia has, however maintained
control over some aspects, as it has made commercial banks responsible for checking the validity
of trade-related currency transfers abroad, with the purpose of discouraging currency outflows
related with some illegal practices such as: tax evasion and money laundry.

The Russian monetary and exchange rate policy framework has undergone massive change over
the years, and it is still in the process of transformation. During most of the 2000s, the Central
Bank of Russia tightly steered the ruble’s external value, therefore, leaving little space for
maneuvers in the sphere of active monetary policy. The reason of influencing ruble’s
convertibility had the expressed intention from the Government to ease Russia’s transition
towards a market economy. After the 2008–2009 crisis, the Russian Foreign Exchange Market
was affected by the Central bank’s measures aimed at stabilizing the economy by targeting

The implications of internal and external factors affecting the Russian Financial Market will be
further analyzed. The measures taken by the Central Bank of Russia and the Russian
Government towards revitalizing the market, as well as their implications on different financial
sectors will be discussed. By analyzing the implications over the Money Market, the Capital
Market, the Equity market, the Banking sector, while reviewing the Central Bank of Russia’s
objectives and instruments of managing the market, the nature of the operating environment, the
characteristics of the exchange rates and monetary policies as well as aspects regarding the
influence of liquidity, a conclusion can be drawn regarding the functionality and development of
the Russian Financial Market.

Money market

Due to the fragmented and complex structure of the banking sector, liquidity is not evenly
allocated among banks, using the interbank markets. As only 30 of the biggest banks, mostly
concentrated in the Moscow area, are active in interbank markets and able to borrow there
without collateral, they dominate the market with a staggering percentage in interbank market
borrowing of 63 %, leaving a large number of other banks have with no access to the market.

A host of interbank market reference rates is calculated in Russia. The Central Bank of Russia
calculates MIBOR (Moscow Inter-bank Offer Rate), MIBID (Moscow Inter-bank Bid Rate),
MIACR (Moscow Inter-bank Actual Credit Rate), and MIACR-IG (Moscow Inter-bank Actual
Credit Rate – Investment Grade). Maturities range from one day to one year.

The Central Bank of Russia also calculates RUONIA (Ruble Overnight Index Average), which is
the rate of unsecured overnight loans of best banks. The National Currency Association
calculates MosPrime, which consists of offer rates of ten leading banks for maturities ranging
from overnight to 6 months. The large number of rates affords ample options as to which rate to
monitor. MIACR covers the largest number of banks while RUONIA and MIACR-IG have the
narrowest coverage and may therefore be preferable due to their homogeneity. On the other
hand, MIACR has the longest time series.

Interbank rates have traditionally been significantly below the inflation rate, but the margin
was squeezed as inflation subsided markedly since 2011. One-day MIACR rates were around 4.3
% in early 2012 while inflation ran at a rate below 5 %, resulting in the daily conclusion of only
deals with the shortest maturities, that is, from one to seven days. According to Bank Rossii, for
2012, the interbank market volume averaged some 225 billion rubles (56 billion euros) a day.

Both the Central Bank of Russia and the federal government issue short-term bonds that are
traded at MICEXRTS. The governmental bonds are called GKOs (Gosudarstvennoye
kratkosrochnoye obyazatelstvo, Government Short-term Commitment) and the Central Bank of
Russia’s bonds are called OBRs (Obligatsiya Banka Rossii, Bank of Russia bond).

Capital market

The Russian capital market consists of government, regional (including municipal) and corporate
bond markets as well as equity markets. A deficient infrastructure leads to a poor development
and the tendency of high sensitivity to the international fluctuations of these types of markets.
All these markets are rather small and shallow and highly sensitive to developments in
international financial markets and the domestic liquidity situation. The lack of proper
institutional investment is an important element holding up the development of these markets.
The majority of bonds are bought by the biggest state-owned banks and banks with foreign

With the only practical institutional investment coming from Vnesheconombank and the Pension
Fund of Russia, the market is seriously underdeveloped. Foreign investors’ role is small, as the
Russian bonds are mostly regarded as instruments for short-term investment. One important
factor limiting foreign investors’ interest is that they can only buy government bonds through a
Russian broker and using a Russian depositary. The market also lacks adequate hedging
instruments. The trading venue for bonds is the MICEX-RTS exchange.

The federal government bonds are called OFZs (Obligatsiya federalnogo zaima, Federal Loan
Obligation), with maturities ranging from 1 to 30 years. The government also issues non-
marketable fixed-rate savings bonds, GSOs (Gosudarstvennaya sberegatelnaya obligatsiya,
Government Savings Bond), aimed at attracting institutional investors.

Although the federal government bond market has experienced a slight growth according to
Bank Rossii, it still is underdeveloped. The main reason for its limited size is that the federal
budget ran surpluses from 2000 till 2008, which made borrowing unnecessary. During that time
federal government borrowing amounted only to some 170–250 billion rubles annually,
according to the Finance Ministry in 2011. Bonds were issued mainly to maintain a domestic
government debt market and provide the bond market with a reference rate.

The situation changed beginning with 2009 as the federal budget turned to deficit, continued
with 2010’s deficit and with prospects of a blurry budget deficit all the way to 2015.
In 2009 and 2010 government issued bonds summed up to 401 and respectively, 716 billion
rubles. Respecting the average of five years maturity, the year of 2011, brought bonds issues of
600 billion rubles, according to Russian Bank. Out of all these issues, Moscow city area
maintains its leadership with more than half of the bonds being issued here.

The corporate bond market has also been in pace with the economic variation of the market,
showing both boom in periods of economic development, as well as contractions in times of
Equity market

Russia’s two major stock exchanges, the Russian Trading System (RTS) and the Moscow
Interbank Currency Exchange (MICEX) merged in December 2011. The merger was initially
only on paper, with the factual merger beginning only as of 2012, gradually towards 2013.
Trading in RTS is conducted in dollars, as opposed from in MICEX, traded only in rubles. This
single trading venue was created with the purpose of improving the functionality of the market as
well as strengthening its infrastructure. The creation of a central securities depositary as of 2013
is seen as a major improvement, aiding the Russian markets to attract more foreign investors.

Equity trading volumes are still poor in the Russian exchanges. Total market capitalisation did
not managed to amount to pre-crisis levels, as the peak was observed in 2007, when it reached 98
% of GDP (Central Bank of Russia). The concentration of enterprises specific sectors such as: oil
and gas and banking, leads to a higher index volatility than in other stock exchanges around the
world. Oil, gas and electricity sector companies accounted for 43 % of turnover in Russian stock
exchanges, followed by a percentage of 42 % in banking sector, 10 % to metals and 5 % to
telecommunications, according to Bank Rossii in 2013.

Banking sector and other financial intermediaries


The Russian banking sector is considered to be underdeveloped in terms of its size relative to the
GDP, as the ratio of the sector’s total assets to GDP was 77 %, and own-capital-to-GDP 13 % at
the end of 2011. According to Bank Rossii, deposits have also been limited, as the household
deposits amounted to 22 % of GDP and deposits of NFE and organizations to 25 %of |GDP in
2011, while lending to households and non-financial enterprises equaled a 40 % of GDP.

The Russian economy has experienced several crises over the last years, with the most
significant being the 1998 crash, in term of side effects over the financial sector. After each
crisis, commodity prices have recovered quickly, reviving export earnings and helping the
economy to recover.

During the 2008–2009 crisis the Central Bank of Russia’s quick emergency assistance was also
instrumental in supporting banks. Due to the underdeveloped state of the banking sector, no
domino effects of bank failures have occurred. There are only a few banks of systemic
importance and they are primarily majority state-owned.

In 2010–2011 the sector experienced some serious bank failures as a result of illegitimate
activities being exposed. Bank of Moscow and Mezhprombank, were the biggest banks in need
to be rescued, as the other ones affected were relatively small and not interconnected.

The irony is that rather than severely damaging the banking sector, the series of crises affecting
the Russian markets had a great impact on the enhancement of regulation and supervision, and
have thus improved the functioning of the markets.

With a staggering number of about 980 banks operating in Russia at the end of 2011, largely due
to some kind of post-Soviet economic and political environment legacy, as well as a
liberalization of the economy provoked by insufficient regularization and supervision, various
kinds of financial initiative were encouraged. More specifically, hundreds of small firms calling
themselves banks were easily established to deal with securities transactions, capital exports, and
currency exchange, as these activities were poorly regulated and hugely profitable.

The number of banks is slowly declining, due to bank mergers and cancellation of operating
licenses. Improved regulation and supervision have led to a decrease in the number of such
organizations. One of the important changes in the sector’s structure over the past 10 years took
place in the second half of the 2000s when the consolidation of market shares of the biggest
banks intensified.

The driving forces behind the process were the state and state-owned banks. State banks actually
benefited from the 2008–2009 economic crisis, serving as agents for distributing crisis financing
to the economy. They also received direct capital injections from the state and acquired some of
the troubled private banks. The leading position of state banks is a feature that singles out Russia
from the other European former planned economies.

Concentration is an important characteristic of the Russian Banking system, as the share of the
five biggest Russian banks is 48 %, and the leadership of Russia’s biggest bank, state-owned
Sberbank, with a market share of 27 %. Of the top-ten banks by asset value, six were state-
owned, two were private domestic banks and two were foreign-owned. The six state-owned
banks’ combined share in total assets of the sector was 52 %, thus playing the cards on the

Foreign banks cannot have branch offices in Russia, the law states that in order to be present in
the market, foreign banks have to establish subsidiaries. The maximum allowable share of
foreign capital in the Russian banking sector’s total capital is 50 %. The Russian banking sector
is therefore, highly fragmented, and is described by a lack of trust among banks. This lack of
trust stems from problems in law enforcement and protection of property rights. This fragmented
structure of the market hampers normal functioning of the financial system and limits the
effectiveness of Central Bank’s monetary policy.

According to the Central Bank of Russia, Russian banks’ foreign indebtedness has increased
quickly before the 2008 crisis but then has subsequently diminished. Disregarding the level of
combined foreign indebtedness of the sector, which is compared to other European countries is
small, some mid-sized and smaller banks have significant foreign debt burdens.

The abundance of liquidity in the banking sector characteristic for the 2000s, lead the banks to
have kept significant amounts of money at the Central Bank of Russia, in correspondent accounts
or as deposits. As the liquidity situation tightened, at the end of 2011, only 3 % of banks’
combined assets were in CBR accounts, 44 % were granted as credits to non-financial
enterprises, 13 % were credits to households and 10 % credits to other banks. Bond holdings
made up 14 % of assets, states Bank Rossii in 2012.

Dollarization has declined during the past decade as the Russian economy has stabilized, and the
ruble gained more power. Therefore, by 2012, foreign currency denominated credits granted by
Russian banks and banks’ other foreign currency placements amounted to 26 % of their total
credits and placements. The share of households’ debt that was foreign currency denominated
was 6 %, as the share of foreign currency deposits in total household deposits was 19 %.


The level of development of Russia’s nonbank financial institutions is even lower than that of the
banking sector. An indication of the small size of the sector is that insurance premiums amounted
to just 1 % of GDP in 2011.Following the trend of the banking sector, the insurance sector is also
highly fragmented. In 2012, about 580 insurance companies (Federalnaya sluzhba po
finansovym rynkam (2012) were operating on the market. The sector consists of a hard core of
relatively large entities and a large number of small ones.

Concentration is also a characteristic of this sector, as the ten largest companies collected 57 %
of total insurance premium in 2012. Russia’s insurance sector is mainly in the hands of private
companies. The government gave up its remaining stake in the country’s largest insurer,
Rosgosstrakh, in 2010. The second largest insurer, Ingostrakh, was also privatized in the 1990s.
The third largest company, Sogaz, which controls about 9 % of the market, belongs to the state
gas monopoly Gazprom. Unlike foreign banks, foreign insurance companies are allowed to
establish subsidiaries in Russia, however, the market was not successful in attracting significant
sums of foreign capital, although the share of foreign capital in the total sector capital is 22 %.

Insurance companies, as well as private pension funds, are not strong enough to act as
institutional investors in Russia, which seriously hampers the development of capital markets.

Central Bank’s objectives and instruments

According to the Law on the Central Bank of Russia, the bank’s monetary-policy objective is to
maintain the stability of the ruble. In practice, the Central Bank of Russia has since 2009 been
targeting inflation, thus gradually relaxing ruble exchange rate. Other objectives of the Central
Bank of Russia are the development and strengthening of the banking system as well as, ensuring
the effective and reliable functioning of the payments system.

The Central Bank of Russia is not very independent in its monetary policy decisions, as the Law
on the Central Bank states that the CBR plans and carries out monetary and financial policy in
cooperation with the Russian government. The Central Bank of Russia must submit to the
government for discussion and present to the Duma, an annual basic outline of monetary and
financial policy for the following three years.

The Central Bank of Russia’s monetary policy tools are listed in the Central Bank Law:
1) interest rates on CBR operations;
2) reserve requirements;
3) open market operations;
4) refinancing of credit organizations;
5) currency interventions;
6) setting of money-supply targets;
7) direct quantitative restrictions;
8) bond issues.


Due to its dependency on the volatility of the prices of raw materials, Russia has to deal with
significant volatility in export earnings relating to commodity price developments in
international markets. For most of the 2000s, crude oil and other commodity prices have been
rising and so has Russia’s export income. In the past 10 years, Russia’s current account has
registered large surpluses, that averaged over 5 % of GDP. Moreover, higher interest rates than
abroad and an appreciating ruble have attracted foreign capital to Russia, often brought in by
Russian banks.

As the result of significant foreign direct investment inflows, with an average of 3 % of GDP
annually, Central Bank of Russia had to focus on preventing the strengthening of the ruble and a
rapid inflation. The central bank and the government tried to prevent the ruble from appreciating
itself, through interventions in the Forex market, by selling rubles against foreign currencies.
This method has proved inefficient, according to the central bank, as it leaded to an increase in
liquidity in the banking system and rapid inflation.

Another tool used by the Central Bank of Russia was to limit capital inflows by setting reserve
requirements differentiated according to residency, therefore, the highest reserve requirements
would apply to commercial-bank liabilities of foreign entities.

Another instrument to be used, proposed by the Ministry of Finance in 2012 is a tax on interest
payments on bonds emitted abroad. The crisis years of 2008–2009 were abnormal in the sense
that the ruble experienced depreciation pressures. A managed devaluation of the ruble took place
at the end of 2008 and early 2009, as the Central Bank of Russia was spending around 200
billion dollars of its forex reserves to smooth the currency’s depreciation, that reached to about a
third of the dollar value.

With the subsequent recovery of the economy, the Central Bank of Russia at times intervenes in
the markets to buy currencies. In the 3
quarter of 2011, as the world economic situation
worsened, the Central Bank of Russia again reverted to buying rubles in order to increase their
value. It is generally expected that Russia’s now-strong current account will weaken in the
coming years as the value of imports increases at a faster pace than that of exports. The value of
exports depends almost solely on the development of energy prices, which are currently at a high
level. This should diminish the appreciation pressure on the ruble.

Exchange rate policy

A definite change occurred in Central Bank of Russia in the matter of exchange rate policy after
the 2008–2009 crisis. Before the crisis the Central Bank of Russia had tightly steered the external
value of the ruble, opposing to the period after the crisis, when the central bank began to
gradually withdraw from active intervention. International financial institutions have long
recommended to Russia to make such a change in policy.

As a result, for the monetary and financial policy for 2012–2014, Central Bank of Russia,
restates that the main task of the bank during this period is to significantly reduce its direct
influence on the ruble exchange rate and to move to a floating exchange rate regime.

Russia’s current currency regime is classified as a managed float. The 2008–2009 crisis,
represented the point at which the Central Bank of Russia, found necessary to introduce a rule
for managing the rate. The ruble exchange rate vis-à-vis a pre-established basket will move
within a corridor rather freely in line with supply and demand. In case of necessity, the Central
Bank of Russia is ready to intervene in the market to keep the rate inside the corridor.

The Central Bank of Russia has gradually widened the fluctuation corridor and eased the rule for
adjusting it. It also carries out the so-called targeted interventions, with the purpose of offsetting
market participants’ expectations of exchange rate movements caused by short-lived changes in
the international economic situation.

The main currency that the Central Bank of Russia uses in interventions is the dollar, although
euros are also used. Excepting the 2008–2009 crisis interventions, the central bank are less
frequent and mostly aimed at limiting the appreciation of the ruble.

Monetary policy and liquidity

The Russian financial market is considered to be extremely volatile, thus leading to an active
usage of both liquidity absorption and liquidity supply tools by the Central Bank of Russia. The
tools they use are largely influenced by the heterogenity of the banking sector.

For liquidity absorption the Central Bank of Russia uses deposit operations, bond sales and
reserve requirements. The central bank’s standing facility deposits are characterized by fixed
interest rates and the range of maturities from overnight to seven days. The bank’s open market
operations consist of deposit auctions with one-month maturity. In the case of longer maturities,
of up to 3 months, the Central Bank of Russia issues its own debt papers, OBRs. Only the
tightening of the banks’ liquidity situation, lead to a decrease in the demand of these OBRs.

Another form of absorbing liquidity is by using federal government short-term bonds (GKOs), or
reverting the sales of government securities from its portfolio without buy-back obligations.

By means of liquidity supply, the Central Bank of Russia offers standing facility fixed rates
credits that banks can obtain on demand in order to smooth out the changes in banks’ liquidity
positions. This implies overnight credits, one-day currency swaps, and one-day repo and
Lombard credits. The crisis, had aided in the worsening of loaning terms, with the prospects of a
readiness from the Central Bank of Russia to support banks if the need arises, in the prospects of
the revival of the economy.


To conclude, it would be safe to assert that the Central Bank of Russia is faced with a demanding
task of conducting monetary policy in an environment that is characterized by underdeveloped
financial markets and large and volatile capital flows. Due to the fragmented and complex
structure of the banking sector and of other non-banking institutions, the unevenly distributed
liquidity, the high sensitivity to the international fluctuations, and especially to variations in
commodity prices, Russia’s policies are hard to assess. During the last 10 years, that the Central
Bank of Russia, had conducted a restricted monetary policy by targeting the exchange rate
and the great excess of in the banking sector. However, the positive results regarding the
absorption of extra liquidity expected to arise from the interest rate policy conducted by the
Central bank or the emission of bonds, have ceased to appear.

Therefore, we assist to a change in the monetary and exchange rate policy framework, as the that
the Central Bank of Russia is moving towards inflation targeting and has increased the necessity
of a sound interest rate policy. Considering all of the above, it is necessary for the Central Bank
of Russia to be able to correctly assess the state of the market and implement policies


1) Larionova, M. , Shelepov, A. - Reinvigorating Growth Potential: Priorities for the Central
Bank of Russia (2013)
2) The Central Bank of The Russian Federation Annual Report on 2011 (2012)
3) The World Bank in Russia- Russian Economic Report - Moderating Risks, Bolstering
Growth (2012)