Russian banks run out of money to cover budget deficit

Semen Ruban - 1 August, 13:25

Russian banks have no money to buy government bonds. Photo: Getty Images

Russian banks currently have no free rouble liquidity to buy federal loan bonds, which Russia's Ministry of Finance uses to cover the budget deficit.

Source: Taras Skvortsov, Vice-President and Chief Financial Officer of Russia's Sberbank, the largest state-owned banking company in Russia, as reported by The Moscow Times, an independent Amsterdam-based news outlet

Details: Skvortsov said this situation was caused by an outflow of cash from banks, which reached about RUB 2 trillion (US$25 billion) since the beginning of the year and created a liquidity shortage in Russia's banking system.

Quote: "Today, banks only have funds to lend to clients – that is their core business. Federal loan bonds can be bought when you have free liquidity and are confident in it, especially if there is no significant premium. Today, the situation is the opposite."

More details: Banks' money is urgently needed by the budget, which ended the first half of the year with a deficit of RUB 5.7 trillion (US$72 billion) and faced overspending on the war in Ukraine.

This year, spending could be RUB 4-5 trillion roubles (US$50-63 billion) higher than planned, and the Finance Ministry will need to raise RUB 2-3 trillion (US$25-38 billion) in additional borrowing to finance it, Bloomberg sources reported in June.

Russia's Ministry of Finance initially included market borrowing of RUB 4.4 trillion (US$55.5 billion) in its budget plan. But in July, it was forced to suspend government debt auctions: federal loan bond prices collapsed, yields rose sharply and banks that had bought government securities suffered RUB 200 billion (US$2.5 billion) in losses from negative revaluation.

Skvortsov said all hopes now rested on support from Russia's central bank. It is already actively lending to banks that buy Russian government debt: since the beginning of the year, it has injected RUB 2.3 trillion (US$29 billion) in additional loans into the banking system, bringing the total debt owed by credit institutions to the regulator to RUB 6 trillion (US$75.7 billion).

Background:

Russia's Central Bank recently cut its key interest rate and released a new macroeconomic forecast, in which projected inflation rose from 4.5-5.5% to 6-7%.
Earlier reports indicated that Russia's federal budget spending and deficit for 2026 could exceed official plans by more than RUB 1 trillion, or US$12.85 billion.

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