Russia starts selling treasury bonds to manage liquidity

The Russian central bank has been selling limited amounts of domestic treasury bonds to manage rouble liquidity in the banking system, the bank said on Wednesday. The absorption of roubles suggests the banking sector is recovering, having been previously squeezed of liquidity after sanctions were imposed on Russia for its activities in Ukraine in 2014 and a steep fall in oil prices.
The bond sales - the first such move in years - also underline the central bank's concerns that an uncontrolled liquidity surplus may hamper the effectiveness of the bank's interest rate policy and lead to higher inflation. The bank carried out the sales in April and May "as a tool to regulate liquidity of the banking sector", it said in an emailed statement. Analysts and investors have noticed an increase in sales of domestic bonds and wondered about the seller.
"This is a relatively new development as the Central Bank of Russia hasn't been using open market operations actively for years," Dmitry Polevoy, chief economist for Russia and the CIS at ING, wrote in a note. "This shows that liquidity conditions are indeed an important factor the central bank is looking at." Consumer price inflation stood at 7.3 percent in April.
The central bank, which aims to bring inflation down to 4 percent by late 2017, kept its key rate unchanged at 11 percent in April. It said it assumed rates in the economy would fall even without a reduction in the key rate, due to "the ensuing changeover in the banking sector to a liquidity surplus". Liquidity conditions are easing as the government funds its budget deficit from its Reserve Fund, a policy that results in the central bank providing roubles to the government to fund expenditures.
The central bank did not disclose how many treasury bonds it had sold, but Polevoy estimated the sales at between 50 billion roubles ($756 million) and 100 billion roubles. He also said that given the limited size of the central bank's portfolio, its liquidity absorption capacity looked limited. According to its annual report, the central bank increased the amount of domestic treasury bonds in its portfolio 1.4 times to 207.2 billion roubles last year. The OFZ treasury bonds are the main domestic borrowing mechanism for the finance ministry, of which it plans to sell 800 billion roubles this year.