Monetary policy harmonisation with Russia may be delayed

<p> Brief: </p> <ul> <li>On 10 September 2021, the Council of Ministers of the Union State approved the 2021-2023 guidelines for the implementation of the provisions of the Treaty on the Creation of the Union State and 28 Union State programmes aimed to accomplish major aspects of strengthening Russia-Belarus integration. A significant part of the programmes concerns the integration of the financial sectors of the Belarusian and Russian economies.</li> <li>In the process of unifying Belarus’ bank deposits guarantees with Russian standards, limits on deposit compensation may be introduced.</li> <li>Access to financial statements provides information on Belarusian companies to Russian competitors.</li> <li>Reciprocal access to financial markets carries risks. Since Russian banks and insurance companies have inherently greater market power, Belarusian companies may be gradually squeezed out of the domestic market.</li> <li>The changes that happened to the Belarusian economy in 2020-2021 and the actions of the authorities may postpone the transition of Belarus’ monetary policy to inflation targeting indefinitely. This implies that the clear prospects for monetary integration with Russia are also called into question.</li> </ul> <p> On 10 Sep 2021 Minsk hosted a session of the Council of Ministers of the Union State of Russia and Belarus, attended by Prime Minister of Russia Mikhail Mishustin and Prime Minister of Belarus Roman Golovchenko. </p> <p> On 10 Sep 2021 the Council of Ministers of the Union State approved the 2021-2023 guidelines for the implementation of the provisions of the Treaty on the Creation of the Union State and 28 Union State programmes aimed to accomplish major aspects of strengthening Russia-Belarus integration. </p> <p> On the same day, the Russian government made public “major avenues of union construction” covered by 28 union programmes. A significant part of the programmes concerns the integration of the financial sectors of the Belarusian and Russian economies. </p> <p> In particular, the parties have agreed on the following: </p> <p> ·        Harmonization of monetary policy and macroprudential regulation. This implies that by December 2022 the Central Bank of Russia and the National Bank of Belarus will come to terms on the principles and mechanisms of monetary policy harmonisation. The implementation of the agreement will be aimed at achieving a comparable and sustainably low level of inflation and creating similar financial conditions for economic entities in both countries; </p> <p> ·        </p> <p> Harmonization of FX regulation and currency control. The parties have agreed that they will harmonize the rules for opening of bank accounts by residents in non-resident banks, FX operations and requirements for repatriation of FX proceeds; </p> <p> ·        Harmonization of information security requirements in financial sector. The parties have agreed to harmonize approaches to ensuring information security, creating a mechanism of mutual recognition of information security audit results, applying cross-border integrity control and authentication during electronic information exchange; </p> <p> ·        Harmonization of regulations of credit and non-credit financial institutions as well as the financial market as a whole, with uniform deposit insurance principles. The parties have agreed to harmonize regulation of the financial market, in particular leasing organisations and micro-financial institutions, as well as mutual admission of banking and insurance organisations to the financial markets of the Union State; </p> <p> ·        Harmonisation of anti-money laundering and financial terrorism (AML/CFT) requirements for the financial sector. An agreement has been reached between the Central Bank of Russia and the National Bank of Belarus on harmonizing the AML/CFT legislation of the two countries for the financial sector and on implementing joint measures in this area; </p> <p> ·        Payment system integration in the area of national payment card systems, financial messaging and settlement systems, implementation of ISO 20022 international standard for financial messaging, rapid payments system, development of financial technologies, harmonised approaches to payment system supervision and monitoring. The parties have agreed to improve the mechanisms for cross-border exchange of financial information between Russian and Belarusian credit institutions and legal entities and develop cooperation in the field of instant payments, financial messaging and settlements, supervision of payment services market participants, development of financial technologies; </p> <p> ·        Harmonisation of requirements in the field of protection of rights of consumers of financial services and investors and prevention of bad-faith practices in the financial market. The parties have agreed to develop proposals in order to harmonize the Russian and Belarusian legislation with an eye to providing equal scope of financial services consumer rights protection for those who use the same financial services; </p> <p> ·        Unified regulation of accounting and financial reporting. The parties have agreed to create conditions for the circulation of comparable consolidated financial statements of economic entities, the formation of an information base for the expansion of foreign economic, investment and business relations, the access of economic entities to international capital markets, as well as access of interested persons to the financial statements of economic entities. </p> <p> </p> <p> Commentary </p> <p> The arrangements on common principles of bank deposit insurance are of most practical interest to citizens of Belarus. As of today, the deposit insurance principles in Belarus and Russia are far from being unified. Insurance in the Russian Federation covers both individuals and legal entities, but there are limits on deposit repayment amounts. In Belarus, only natural persons are covered by insurance, but there is no limit on the amount of deposit repayment. </p> <p> Thus, if the conditions for guaranteeing bank deposits in Belarus are unified with Russian standards, limits on deposit repayment may be introduced. </p> <p> It should be noted that the current system of 100% deposit compensation in Belarus creates risks for the banking system to get destabilized in the event of problems at the largest state-owned banks (Belarusbank and Belagroprombank). </p> <p> As of 1 September 2021, the banking system had deposits of individuals in the amount of Br7.695 billion and the equivalent of $5.085 billion. Belarusbank and Belagroprombank account for more than half of these resources. Meanwhile, the volume of reserves of the Agency for the Guaranteed Repayment of Bank Deposits of Natural Persons is many times lower - according to the available information at the beginning of 2021 it was slightly over Br2 billion. This means that in an emergency the agency will not be able to cover the entire amount of deposits in Belarusian banks with its resources. </p> <p> For the business community, there are questions about the clause in the union programmes about creating conditions for the circulation of comparable consolidated financial statements of economic entities, about the formation of an information base for the expansion of foreign economic, investment and business relations, about business entities' access to international capital markets, and about access to financial statements of economic entities for parties concerned. </p> <p> Since late 2020, the number of legal entities subject to Western sanctions in Belarus has started to grow. For many of them, the authorities have stopped publishing periodic corporate reports, although previously the disclosure of such reports was required by law. Moreover, in the summer of 2021 the publication of operational statistics on the state of finances and settlements of all manufacturing industries was discontinued. </p> <p> The implementation of the principle of stakeholder access to the financial statements of business entities from Russia theoretically provides Russian businesses and/or authorities with exclusive terms in case they are interested in entering Belarusian assets. </p> <p> Furthermore, one cannot rule out scenarios of access to financial information of Belarusian legal entities by their direct competitors from Russia and its use in competition for sales markets. </p> <p> Risks of losing out in the competition may also be caused by the implementation of decisions on mutual admission of banking and insurance institutions to the financial markets of the Union State. Since Russian banks and insurance companies have inherently greater market power due to the size of the Russian market, Belarusian companies may be gradually squeezed out of the domestic market, which will be filled by financial companies with Russian capital. </p> <p> The likelihood of Belarusian entities being squeezed out of the country’s financial market is heightened by sanctions threats. At the end of June, Belarusbank, Belinvestbank and Belagroprombank were put on the EU sanctions lists. On 9 August, it became known that Absolutbank was hit by U.S. sanctions. </p> <p> According to Nasha Niva, Deutsche Bank closed the correspondent accounts of Belarusbank, Belinvestbank and Belagroprombank in early September. According to the newspaper, Belagroprombank lost its correspondent relations not only with Deutsche Bank, but also with other banks, including German Commerzbank, DZ Bank, Italy’s Unione di Banche Italiane, Poland’s PKO Bank, Russia’s Sberbank, VTB and Rosselhozbank. </p> <p> Belarusian banks act as net debtors to the outside world, as net foreign assets (NFAs) are chronically negative. The main source of net debt for the banking sector is credit lines of foreign banks. As of 1 September 2021, such borrowings amounted to $4.791bn. </p> <p> According to the National Bank, as of 1 January 2021, the external debt of the banking sector amounted to $5.2bn. Russia was the main creditor, accounting for 47.6% of total banking sector borrowings ($2.5bn). Apart from Russian resources, loans from China (19.9%, or $1.0 billion) and Germany (8.9%, or $0.5 billion) accounted for a considerable part of the debt portfolio. </p> <p> On 10 September, Chairwoman of the Bank of Russia Elvira Nabiullina said that the Central Bank of Russia and the National Bank of Belarus are discussing the harmonization of monetary policies of the two countries and assume that in the future the National Bank will move to inflation targeting. She noted that the timing of such harmonization will depend on many factors. </p> <p> “In our view, such a policy will harmonize conditions for business, even without a single currency. And in principle, such harmonization of monetary policies is aimed at creating a more predictable and understandable environment for trade, economic relations, relationships between businesses and companies in our countries," the Bank of Russia’s chief explained. </p> <p> The Russian Central Bank switched to inflation targeting in 2014. The Belarusian National Bank has been using a transitional regime of monetary targeting since 2015. Until 2020, it was assumed that the NBB would switch to inflation targeting in 2020-2021. One of the removable obstacles along the way was the abolition of directed lending. </p> <p> However, the regulator was forced to take a step back in 2020. Instead of zeroing out, the government increased directed lending to the economy, amendments to the Banking Code were not adopted and the National Bank was not granted mega-regulator status (as in Russia). The National Bank returned to a less progressive version of monetary targeting - from using the interbank market interest rate as an operational benchmark to managing the ruble monetary base. </p> <p> Thus, the changes in the Belarusian economy in 2020-2021 and the actions of the authorities may postpone the transition of monetary policy in Belarus to inflation targeting indefinitely. This implies that the clear prospects for monetary integration with Russia are also called into question. </p> <p>   </p>

2021-09-20

Primepress