Russia: Reserve Requirements, 1998

During the 1998 Russian ruble crisis, the Central Bank of the Russian Federation (CBR) implemented several changes to reserve requirements (RR) in two separate crisis periods: before and after ruble treasury default and ruble devaluation on August 17, 1998. Pre-default, the CBR managed a narrow ruble exchange rate corridor, fixed within a 15% range of 6.20 rubles (RUR) to the US dollar (USD) (CBR 1999). During the 1998 pre-default period, the CBR introduced only one change to RRs, on February 1 (CBR 1998e). In an attempt to ease ruble liquidity and to simplify the otherwise fragmented requirements on reserve ratios, the CBR implemented a single RR of 11% for both foreign and domestic currency accounts^FNExcluding the unchanged, 8% RR for ruble household deposits of the state-owned bank, Sberbank (CBR 1999). (CBR 1999). The change reflected an increase in the RRs on foreign currency accounts and a decrease on short-term accounts denominated in rubles. The CBR said its intent was to “[encourage] credit institutions to expand their ruble resources and [discourage] the use of the dollar in the Russian economy” (CBR 1999).

On August 17, against persistent capital flight from ruble assets, the CBR could no longer defend the fixed exchange rate and effectively devalued the ruble by adopting a wider corridor: between 6.00 and 9.50 RUR/USD. The wider corridor still proved unsustainable, and the CBR abandoned the fixed exchange rate and floated the ruble on September 2 (Antczak 2001; CBR 1999).

In the post-default period—as policy efforts pivoted away from exchange rate stability—the CBR administered several relaxations of reserve requirements in concert with other liquidity instruments “to restore the payments system and interbank relations, which were seriously damaged by the crisis” (CBR 1999).

Following August 17, the CBR used several tools, in addition to relaxing RRs, to provide liquidity assistance to the illiquid banking system. The CBR extended direct loans to commercial banks through its existing Lombard and Overnight lending facilities, as discussed in a separate case study by Hoffner (2022b). Another supplementary case study by Hoffner (2022a) explores the CBR’s issuance of its own zero-coupon bonds, OBRs, used by banks at standing lending facilities and newly introduced repo operations. The CBR also extended long-term rehabilitation loans secured by bank equity to select commercial banks (CBR 1999). See Hoffner (2022b) for more information on other supplementary programs the CBR used to support domestic banks during the 1998 crisis. 

The CBR also administered two notable measures in coordination with RR relaxation: multilateral clearing operations and regulatory forbearance. Key Design Decision No. 12B, Changes in Reserve Requirements, discusses regulatory forbearance (CBR 1999; Ippolito 2002).

Multilateral Clearing Operations

In three separate iterations, on September 18, 25, and October 2, 1998, the CBR conducted multilateral clearing operations to address the backlog of nonpayments in the interbank lending market (CBR 1999). The CBR reduced individual banks’ required reserves on a case-by-case basis to facilitate these operations (IMF 1999). See “Discretionary RR Changes” in Key Design Decision No. 12A, Changes in Reserve Requirements.

The CBR announced the first of these measures on Friday, September 18. The Russian Telegraph described it as the CBR’s most important decision for Russia’s payment system. The CBR encouraged banks in the five largest regions of Russia to participate in the clearing operation by giving the CBR access to their entire client card file.^FNTranslation challenges complicate the description of this operation and what exactly “client card file” refers to. The source says that providing the CBR with this file revealed both the budgetary and client debts of a bank (Russian Telegraph 1998). This file would reveal each bank’s outstanding liabilities to its clients and to the government, which the CBR referred to as “budgetary” debts (Russian Telegraph 1998). In exchange, the CBR provided participants with an overnight loan at a low interest rate^FNAnother article (Cherkasov 1998) describes the reverse: the CBR first allowed banks to use RR funds and, if insufficient to settle balances, the CBR provided a low interest rate, overnight loan. in order to quickly settle end-of day balances on Friday, September 18; if a bank needed additional support to clear, the CBR allowed the bank to draw down its own RR funds at the central bank. The CBR then worked with participating banks throughout the night and into the weekend to mutually offset interbank liabilities so that on Monday, the following business day, banks could resume payments. The CBR did not make foreign currency available to banks on that Friday, in order to prevent banks from immediately selling the additional ruble funds on the foreign exchange market (Russian Telegraph 1998).

The CBR ran a similar procedure in the second and third rounds of multilateral clearing operations, which took place on the two subsequent Fridays and also lasted into the weekend (Buza 1998; CBR 1999; Cherkasov 1998). In the first round, most of the largest Russian banks chose not to participate because they did not want to give the CBR their client files. In response, the CBR ordered the Moscow Interbank Currency Exchange (MICEX) to temporarily suspend the six of the largest banks from currency trades (Cherkasov 1998). In the second round, the CBR expanded the operation to include 38 regions in Russia; in this round, the CBR selectively lowered RRs for large, connected Moscow banks to free up liquidity for their regional branches to clear payments throughout the many regions (Buza 1998; Cherkasov 1998). The final round expanded to 73 regions, covering most of Russia. Despite the regional expansion in the third round, the first and second rounds were significantly larger in volume. Together, the three rounds of multilateral clearing operations cleared RUR 54.6 billion outstanding payments for the domestic banking system (Cherkasov 1998).

In the most controversial component of the multilateral clearing operations, the CBR purchased an undisclosed amount of defaulted treasuries from banks at par to allow them to meet their payment obligations (Cherkasov 1998; Russian Telegraph 1998). While the CBR did not publicly reveal the total amount of GKO bills redeemed, one source estimated that the CBR purchased at least RUR 7 billion between the first two rounds of clearing. The move was particularly controversial from the perspective of foreign investors who still held significant portions of illiquid, defaulted GKO bills and, unlike participating domestic banks, could not sell their holdings (Cherkasov 1998).  

The CBR chose not to collect RR shortfalls from or penalize the banks whose reserve ratios the CBR had lowered on a discretionary basis during the multilateral clearing operations (CBR 1999).

Article 75 of the Russian constitution both defined the CBR’s primary policy directive as “ensuring the stability of the ruble” and provided for legal independence from other government institutions in pursuing that mandate (Russian Federation 1993).

Article 38 of the Federal Law of the Central Bank (Central Bank Law) specifically authorized the CBR’s board of directors to set RR terms for banks, subject to constraints (CBR 1998c). Article 38 laid out the following legal constraints on RR management (Central Bank Law 1990, N 394-1, article 38):

• RR ratios cannot exceed 20% of a bank’s liabilities.
• RR changes cannot exceed five percentage points at a given time.
• The CBR can recover RR shortfalls from banks and fine the violating institution; penalties cannot exceed double the refinancing rate (policy rate).

The CBR also noted that it had the right to make unscheduled changes in reserve requirements, as it described in Bank of Russia Directive No. 414U, dated November 17, 1998 (CBR 1999). Article 38 of the Central Bank Law states that the CBR may differentiate RRs between banks (Central Bank Law 1990, N 394-1, article 38). This was the basis of the CBR’s use of unscheduled, discretionary RRs for individual banks during the multilateral clearing operations.

In the pre-default period, the CBR managed RR policy in accordance with its primary objective of ruble stability. As it became clear that the CBR could no longer protect the exchange rate regime, the CBR focused policy efforts toward restoring the domestic payment system and reviving domestic banks (CBR 1998d; CBR 1999). In addition to currency stability, Article 3 of the Central Bank Law lists two other main objectives of the CBR: “[promoting] the development and enhancement of the Russian banking system and [ensuring] the efficient and uninterrupted functioning of the settlements system” (CBR 1998d).

The CBR’s board of directors set RR ratios and other central rules associated with depositing reserves in accounts^FNDomestic banks had three main accounts at the CBR: an RR account (unremunerated), a correspondent sub-account (for banks to use in settling interbank balances), and a voluntary deposit account (interest bearing with maturities of up to two weeks) (Baliño, Hoelscher, and Horder 1997; CBR 1999). Voluntary deposit accounts represented a much smaller component of the monetary base (1.8% by end of 1998) when compared to RR (8.1%) and correspondent (12.6%) accounts (CBR 1999). with the CBR (CBR 1998c). The board of directors delegated the administrative duties, including collecting RR funds, to the CBR’s regional settlement and cash centers (CBR 1996, article 1.6; Segodnia 1998b). These regional centers reviewed RR account balances on the first day of each month. Although the regional centers assessed RR compliance on a monthly basis, the board of directors could use discretion for extraordinary RRs and review banks’ RR balances at any point in the month (CBR 1996, article 1.7).

Domestic banks documented their own account balances daily and reported their funds subject to RRs on a monthly basis to their CBR’s regional cash and settlement centers (CBR 1996, 37, article 2.4). The high reliance on self-reporting from banks resulted in frequent data inaccuracies (Owen and Robinson 2003).

Post-default, the CBR conducted scheduled reviews of RRs twice, on September 1 and December 1, 1998. In these two reviews, the CBR conducted comprehensive examinations of banks’ RR compliance, which revealed large shortfalls in RR funds (CBR 1999).

The State Duma—the lower house of the Federal Assembly (Russian Parliament)—appointed and could dismiss the chairman of the CBR as well as other directors; dismissal of the chairman required presidential approval and could be done only if the chairman violated the law (CBR 1998d; Johnson 2018). The State Duma also appointed an auditor to review the CBR’s reports (CBR 1998d).

The Association of Russian Banks (ARB)^FNBy the end of 1998, ARB members represented 707 commercial banks, or roughly half of all commercial banks, including most of the largest banks (Johnson 2018, 6). In addition to lobbying, some ARB members also held seats in the State Duma and directly influenced financial laws (Johnson 2018). The ARB frequently asked the CBR to relax monetary policy by lowering RRs (Johnson 2018, 116; Moiseev 1998; Segodnia 1998a). was an interest group of commercial banks that lobbied the government to implement favorable financial legislation (Johnson 2018, 14). Commercial banks, represented by the ARB, continued to petition for the CBR to relax RRs throughout the pre-default period; however, the CBR did not entertain these requests until after the default, once it had abandoned the tight ruble corridor (Johnson 2018, 116; Moiseev 1998; Segodnia 1998a).

Before the start of each year, the CBR submitted to Parliament (State Duma) a document, called Guidelines for the Single State Monetary Policy (henceforth “Guidelines”), which summarized the CBR’s policy goals and constraints for the year ahead (CBR 1999). The 1998 Guidelines, which the CBR delivered to Parliament toward the end of November 1997, communicated the CBR’s intention to lower RRs on ruble deposits and raise those on foreign accounts; the CBR intended to strengthen the ruble against depreciating pressures to preserve the ruble exchange rate corridor. The plans to raise RRs on foreign liabilities in the 1998 Guidelines disappointed the commercial banks of the ARB that had wished for a reduction in foreign currency RRs (Cherkasov 1997; Ekonomika i Zhizn’ 1997). Parliament also refused to approve the Guidelines; however, due to its legal independence, the CBR did not require Parliament’s approval.^FNThe CBR faced considerable parliamentary opposition to the 1998 Guidelines and the CBR’s aggressive defense of the ruble (through rate hikes and RR policies) (Ekonomika i Zhizn’ 1997). In April 1998, the Russian Parliament’s Federation Council (upper house) submitted a draft bill to the State Duma, which proposed to limit the CBR’s independence, in part by requiring Guidelines to receive legal approval (NG Polytechnics 1998); this controversial bill, however, did not pass the State Duma (Kuzmichev 1998). Adhering to the 1998 Guidelines, the CBR’s public relations department circulated a press release on January 30, 1998, that announced the lowering of RRs on ruble accounts and raising of RRs on foreign currency accounts, effective February 1 (CBR 1998b; Nezavisimaia Gazeta 1998). According to the CBR, the RR changes along with rate hikes helped discourage speculative bets against the ruble (Interfax AIF 1998).

In the post-default period of 1998, the 1998 Guidelines became obsolete, as the CBR no longer upheld the rigid ruble corridor; post-default RR policy, therefore, did not necessarily conform to the parameters of the 1998 Guidelines (CBR 1999).

CBR implemented the first of the post-default RR relaxations on August 24 and communicated the decision at least as early as August 22, based on contemporary news articles (Segodnia 1998b). The CBR’s subsequent RR change, implemented on September 1, may not have been publicly disclosed until after the fact, since news articles reported on the change several days later (Ekonomika i Zhizn’ 1998; Vremia MN 1998). Additionally, one article reported that the September 1 change—namely, the differentiating of RRs based on banks’ exposure to defaulted treasuries—would be in effect for two years, ending September 1, 2000 (Vremia MN 1998). Before the end of the year, on December 1, 1998, the CBR replaced this RR policy with a unified RR ratio (CBR 1999).

Despite some of the CBR’s inconsistent RR communication in the post-default period, the CBR disclosed RR policy more transparently than other liquidity operations. The CBR regularly detailed changes in RR measures on its website and in its monthly bulletin (CBR 1998c; CBR 1998e). In contrast, the CBR did not publicly disclose many of the operations of its lending programs in the post-default period, a choice that drew frequent criticism in the press (Ladygin 1999; Rao 1998). See Key Design Decision No. 18, Disclosure, in Hoffner (2022b) for further discussion on the limited disclosure of CBR lending facilities.

The CBR did not allow banks to use any income-generating assets when depositing RR account funds (CBR 1996, 37, article 1.8). To form RR accounts, banks had to transfer rubles from their correspondent accounts to RR accounts, indicating that qualifying assets were all denominated in rubles (CBR 1996, 37, article 3.2). Additionally, banks would subtract any ruble cash on hand from the amount owed when computing their RRs (CBR 1998a, 175-U, annex 1).

The CBR defined reservable liabilities as either ruble or foreign currency liabilities in settlement accounts, current and deposit accounts, budgetary accounts (debts to the government), and extra-budgetary accounts (debts to pensions and other quasi-government accounts) (CBR 1998a, vol. 175-U, para. 2.1).

As described in Key Design Decision No. 10A, Changes in Reserve Requirements, before February 1, 1998, the CBR applied four different RR ratios according to maturity and currency of reservable liabilities: ruble demand accounts and time liabilities up to 30 days, ruble time liabilities between 31 and 90 days, ruble time liabilities over 90 days, and foreign currency funds (CBR 1998c). From February 1 until September 1, the CBR applied the same RR ratios regardless of the maturity or currency denomination of reservable liabilities (CBR 1998e; Nezavisimaia Gazeta 1998). On September 1, the CBR applied separate RRs for foreign currency liabilities before reunifying all RRs on December 1 (CBR 1998c).

To manage reserve requirements, the CBR developed a system in 1994 under which banks could choose among four options to calculate their respective deposit base subject to an RR. Banks calculated the size of their deposit bases monthly as of one of the following (Baliño, Hoelscher, and Horder 1997):

• The first day of the month
• The 16th day of the month
• The daily averages over the month
• The average of deposits at the end of each five-day period over a month

This fragmented system, however, provided for less transparency and consistency in how banks reported their deposits. As of May 1996, the CBR only allowed banks to report their deposit base using an average of daily balances between the 5th and 30th day of the month (Baliño, Hoelscher, and Horder 1997).

For mandatory reserves held in the RR account, the CBR allowed for an additional averaging mechanism accessible to banks that had complied with RRs in the preceding six-month period. Banks approved for this RR averaging had to ensure that the monthly average balance of their RR accounts complied with statutory RR ratios. However, on a given day, approved banks could reduce RR funds below the statutory ratio and transfer up to 5% of these funds to their correspondent accounts to settle interbank balances. As a result, such banks received additional liquidity from their RR funds (Baliño, Hoelscher, and Horder 1997). 

The CBR implemented changes in RR ratios by shifting banks’ balances held in RR and correspondent accounts. For instance, when lowering RR ratios, the CBR transferred the excess funds of RR accounts to banks’ correspondent accounts, which banks could freely use for interbank payments (Segodnia 1998b).

The CBR developed a fee schedule, based on the refencing rate (policy rate), for banks whose reserves fell below required levels; see to Figure 2 (CBR 1996, appendix 10). However, the CBR did not always collect such fines. Key Design Decision No. 10B, Changes in Reserve Requirements, provides further information on the CBR’s decision to waive fees for select banks.

The 1990 Federal Law on Banks and Banking defined a credit institution as a legal entity, licensed by the CBR to carry out banking operations in pursuit of profit, as its main objective. Credit institutions were domestically licensed and sorted into two categories: banks and non-bank credit institutions (NBCOs). Banks were exclusively allowed to attract deposits from individuals and businesses, which they could then use to invest or make payments (Russian Federation 1990, 395–I, article 1). Article 25 of the law required all credit institutions to adhere to the RR ratios put forth by the CBR (Russian Federation 1990, 395–I, article 25).

Between February 1 and September 1, 1998, all “credit institutions,” with the exception of Sberbank, faced the same RR terms on their liabilities (CBR 1999). Sberbank was the state-owned savings bank and possessed about three-quarters of household deposits in Russia (IMF 1999).  Sberbank benefited from an already lower RR ratio for its ruble-denominated household-deposits than commercial banks faced (CBR 1998e). When the CBR changed the RR system on September 1, 1998, by differentiating ratios according to three tiers, the CBR set Sberbank’s RR ratios on the lowest of the tiers (CBR 1999).

In the pre-default period—from the start of 1998 to August 17—the CBR changed the RR only once, on February 1, by unifying the otherwise differentiated RR system along a single RR ratio (CBR 1998e). As part of the same announcement, the CBR also dramatically increased the refinancing rate from 28% to 42%, effective February 2, with the primary CBR lending facility (Lombard) also adopting this higher rate. Together, these CBR measures attempted to bolster ruble demand and maintain the exchange rate corridor (Interfax AIF 1998).

The treasury default and ruble devaluation resulted in immense portfolio losses and heavy foreign debt exposures for commercial banks; subsequently, in the post-default period, the CBR implemented RR policy measures more frequently and aggressively (CBR 1998e; Ippolito 2002). On August 24, 1998, one week after the default, the CBR reduced RR ratios unilaterally (CBR 1999). On September 1, one week after this reduction, the CBR relaxed RRs sharply to help banks with large treasury exposures. On the same day, the ruble depreciated past the limits of the corridor, prompting the CBR to switch to a floating exchange rate on September 2 (Antczak 2001; CBR 1999).

The CBR implemented the next official RR change on December 1, 1998, during a scheduled review of RRs. The CBR conducted these RR reviews, which included examinations of RR compliance, twice in the post-default period: on September 1 and December 1 (CBR 1999).

Throughout the 1998 crisis, the CBR implemented many changes to its RR policy; this case identifies four categories of changes:

• Changes to RR ratios for commercial banks
• Changes to RR ratios for Sberbank
• Changes to the calculation of foreign currency RRs
• Discretionary RR changes

Commercial Banks

Before February 1, 1998, the CBR differentiated RR ratios with respect to both maturity (demand vs. time deposits) and currency account (ruble vs. foreign-denominated) (CBR 1998c). Beginning February 1, the CBR simplified RRs to a common 11% ratio for all “attracted funds” regardless of term and currency (CBR 1998e; Nezavisimaia Gazeta 1998). This change represented a reduction in short-term ruble RRs, which typically exceeded RRs on foreign currency deposits, and an increase in foreign currency RRs. The CBR maintained this unified 11% RR ratio until just after the default on August 17 (CBR 1998c).

Post-default, on August 24, the CBR lowered the unified RR ratio from 11% to 10%; the change amounted to a liquidity injection of RUR 4 billion (Segodnia 1998b).

With effect September 1, and lasting through the end of November, the CBR lowered RR ratios based on a three-tier system. Figure 3 summarizes the tiers, which depended on a commercial bank’s exposure to defaulted ruble treasuries (GKO-OFZ) (CBR 1998c).

Source: CBR 1998c

Finally, on December 1, the CBR once again unified RRs to a single ratio of 5% on all liabilities in ruble and foreign currencies (CBR 1998c). See Figure 4 for a complete timeline of RR ratio changes from the beginning of 1997 to the end of 1998.

Despite the CBR’s significant relaxing of RR in the post-default period, banks, in large part, failed to meet the reduced requirements because of the treasury defaults and depreciated ruble. Between January and August of 1998, the CBR noted that shortfalls on RRs ranged from 0.3% to 0.4%. In the post-default period, the CBR conducted two reviews of banks’ RRs, on September 1 and December 1, and found RR shortfalls of 2.5% and 18.6%, respectively. Between these two reviews, the CBR continued to relax requirements alongside three iterations of multilateral clearing operations to cancel debts between participating banks (CBR 1999). Following the December 1 review, the CBR neither levied fines against nor collected the reserve shortfalls of these participating banks. The CBR granted regulatory forbearance to “create favourable conditions for the implementation of measures to overcome financial difficulties” (CBR 1999).

Banks’ RR accounts with the CBR were unremunerated, which afforded the CBR greater influence over the exchange rate by changing the cost of borrowing in ruble or foreign currencies through RR policy (Baliño 1998; CBR 1996, article 1.9).

The CBR offered a remunerated deposit facility (deposit accounts) where banks could deposit surplus funds at CBR branches. Historically, banks expressed little interest in the facility since rates, set by the CBR, fell significantly below treasury yields. The CBR allowed domestic banks to deposit funds through fixed-maturity auctions^FNIt is unclear if the CBR used an auction process for its deposit facility in 1998 since the IMF sources covered CBR operations through 1997 (Baliño, Hoelscher, and Horder 1997). on an overnight, next-day, one-week, and two-week (beginning October 8, 1998) basis (Baliño, Hoelscher, and Horder 1997; CBR 1999). Throughout the year, the CBR changed terms of the deposit facility both to regulate liquidity and support monetary policy. Over the course of 1998, interest rates on the deposit facility ranged from 3% to 80% annually (CBR 1999). The CBR changed interest rates on the deposit facility in correlation with other domestic interest rates, such as the rates on Lombard lending and interbank financing (CBR 1998c). In 1998, the CBR also expanded eligibility for the deposit facility by lowering the minimum deposit requirement from RUR 50 million to RUR 30 million on October 26, then to RUR 20 million on November 23 (CBR 1999).

We have not discovered additional restrictions on reserve requirements.

On August 17, along with the government’s default on ruble treasuries, the CBR widened the ruble corridor from a tight band ( /- 15%) of around RUR 6.20 per US dollar to a wider range of between RUR 6.00 and 9.50—which it intended to maintain through the end of 1998 (CBR 1999). The subsequent relaxation of RRs on August 24 added RUR 4 billion to banks’ correspondent accounts, which freed up additional ruble funds to be sold on the foreign exchange market (Nezavisimaia Gazeta 1998; Owen and Robinson 2003). The ruble continued to depreciate, which the CBR attempted to offset through foreign exchange interventions. On September 1, the same day the CBR introduced large RR relaxation measures, the ruble fell below the limit of the wider corridor; the CBR opted not to intervene and instead switched to a floating exchange rate, beginning September 2 (Antczak 2001; CBR 1999). Less than one week after the float, the ruble depreciated to RUR 20 per US dollar and thereafter stabilized to RUR 15.00-16.00 per US dollar, as shown in Figure 5 (Antczak 2001).

According to a contemporary news article, when the CBR changed RR policy on September 1, 1998, the CBR indicated that this new system of differentiating RR based on ruble treasury holdings would remain in place for two years, until September 1, 2000 (Vremia MN 1998). Nevertheless, on November 16, 1998, the CBR decided to further lower the RR and, beginning December 1, the CBR used a uniform 5% RR ratio for all banks’ borrowings (CBR 1999).

After the resolution of many of the payment blockages in the domestic banking system, and as inflation persisted, the CBR started tightening monetary policy later in the first quarter of 1999. The CBR raised RR ratios from 5% to 7% in March and to 8.5% in June (CBR 2000; Owen and Robinson 2003).