To understand what ruble liquidity is, it is necessary 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 operations with rubles are somehow tied up at the Central Bank of Russia. This is because the Central Bank is the main creditor of both commercial banks and large companies.
Ruble liquidity of the Central Bank - an instrument of influence on the country's economy
It is no secret that any business can live and develop successfully with the help of credit funds. To buy equipment, hire people, organize work, etc., a lot of money is needed. Smaller entrepreneurs are looking for them in commercial banks on a smaller scale, and these banks themselves, respectively, borrow rubles from the Central Bank. Now we can give a first definition of what ruble liquidity is. This is the amount of rubles that the Central Bank has at its disposal to borrow various organizations and banks for a limited amount of time.
Thus, the Central Bank can manage the total number of rubles that are spent in the country and use this parameter to influence some aspects of the economy, first of all, the ruble exchange rate. The logic here is simple: the less 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 different: it is an effective tool 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?
The main obligations of the Central Bank, which are affected by ruble liquidity:
- ensuring the stability of the national currency,
- keeping inflation at a certain level,
- ensuring the sustainable 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 tool we are considering is: if ruble liquidity is declining, then the ruble is strengthening, and vice versa. The central bank can redistribute the flows of rubles for some operations and vice versa - set a limit for others. In particular, there is a limit on ruble liquidity for a currency swap. What it is?
What is a currency swap and why is it needed?
Currency swap is a refinancing tool for which the Bank of Russia provides financial resources. The collateral for transactions is foreign currency. A fixed interest rate is set, which is published daily on the Central Bank website (picture below). A foreign exchange swap is an urgent exchange operation performed by two parties on the purchase / sale of currency on spot terms, that is, payment immediately. In fact, two operations are carried out: one for the purchase of foreign currency with payment here and now at the current rate, the second for the reverse sale of the same currency after a certain period of time on forward conditions, that is, at a predetermined rate.
Currency Swap History
Contracts of this type are considered relatively young - for the first time, London bankers began using currency swaps in 1979. However, only two years later, the financial world fully appreciated this instrument. The first participants in these 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, the opportunity arose to make such transactions with the euro.
What is ruble liquidity? Why is it important when making currency swap transactions?
Consider an example. Suppose company No. 1 wants to purchase equipment for its production in the United States, for this it needs dollars. It would seem that a simple way: to borrow dollars from the Central Bank, which allocates a certain amount of rubles daily to buy currency at the current exchange rate, and then buy equipment. For the received (in rubles!) Profit, repay the loan debt again at the current rate. But the course by this time can change significantly and turn out to be extremely unprofitable for the company. Instead, a transaction is made by the type of currency swap (exchange). This is a kind of insurance of the transaction described above.
Now company No. 1 is looking for company No. 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, which 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 exchange rate, which is called here and now. In the second part, both companies agree that after a certain time they will perform a reverse exchange operation at a predetermined rate. This is just an example scheme, since transactions can be concluded through dealers and brokers, and companies No. 1 and No. 2 may not even suspect the existence of each other. The bottom line is that not one of them will suffer due to changes in the exchange rate in the future. Their losses are limited by the cost of the swap operation, which most often does not exceed 1%, and in some cases can be carried out free of charge.
To conduct such operations, money is again taken from the Central Bank, all operations with which are calculated at the current exchange rate of the ruble. That's what ruble liquidity is, with its help the Central Bank can affect the country's economy.