The increase in the cost of attracted resources used by banks, as well as market volatility has forced banks to change lending terms, tighten collateral requirements, reduce the period of loans’ maturity and stop lending to the riskiest industries.

Increased interest rates on loans to legal entities increased requirements for the financial position of borrowers and the collateral for the loan. These measures are the appropriate response of banks to an increase in risks associated with foreign economic and political factors and significant deterioration of the economic situation in the country.

Many banks have reduced lending, primarily to large and medium-sized enterprises. Large enterprises are now experiencing difficulties in refinancing maturing bonds and lending to them is of high risk today. However, a risk to finance small and medium enterprises is even greater.

Due to a sharp deterioration of the economic environment, enterprises are in a difficult position, they are not ready to expand production, increase investment and to borrow at a high interest rate. The predominant part of loans to legal entities were issued in 2014 for working capital for up to one year. Legal entities, except for loans for working capital, significantly increased the demand for loans by refinancing old debts. Most customers of banks significantly reduced revenue, and they are trying to reduce leverage and size of payments. And in this case, refinancing may give the effect even at face of rising rates.

In the third and fourth quarters of 2014 was an increase in interest rates on loans to legal entities in almost all banks, and this is due to the rising costs of resources involved. The reason for the increase is a lift of the key rate of the Central Bank.

Sberbank of Russia has revised interest rates on corporate loans upwards in the course of the year three times. In late December it was announced that the rate is increased on 3-4 b.p. for previously issued loans at a rate of 9-10% per annum. In addition, Sberbank has raised minimum margins. Sberbank accounts for over a third (38.7%) of the total volume of lending to legal entities (as of 1 December 2014). [1]

In the second half of 2014 and the first quarter of 2015 Sberbank of Russia experienced stagnation of the portfolio of credits to legal entities. The bank’s loan portfolio to corporate customers in February fell by 5.6 percent to 11,79 trillion rubles), due to currency revaluation; since the beginning of the year the growth amounted to 0.8 percent. [2]

Operations with legal entities of Sberbank of Russia include a wide range of operations: maintenance of current accounts, opening of deposits, granting of financing, issuing guarantees, maintenance of export-import operations, collection, foreign exchange services, money transfers in favor of legal entities, etc.

Customer policy of the bank is focused on building long-term mutually beneficial relations with all groups of customers regardless of business size or ownership. When lending priorities were given to enterprises that have a positive credit history, most of financial transactions of which is held in the accounts of Sberbank of Russia.

Developing relationships with these customers, the Bank has introduced the institute of customer managers and held managers for large clients. In addition, a system of managing customer relationship, which includes a complete dossier of clients, including information on sales volumes, financial performance, customer contacts, the implementation of transactions with customers was created.

The focus of many branches of Sberbank of Russia on services to corporate clients, the bank’s image and strong relationships with borrowers provided it with significant competitive advantages in this area of banking business. Among them are: a high level of services to corporate clients, based on years of experience; a developed effective system of trnsactions, high speed of services, individual approach to each client; ever-expanding range of banking products offered to clients. [3]

Due to low predictability of the future dynamics of the main factors influencing financial results, Sberbank of Russia has tightened requirements for borrowers, increased level of monitoring of undertaken risks, has adopted a more conservative approaches in risk assessment and increased reserves for possible losses to a level adequate to the current level of risk. [1]

In modern conditions of economic instability, decline, deterioration in overall business conditions a necessary practice in all divisions of Sberbank of Russia has become a more rigorous approach to risk assessment, financial condition and prospects of the activity of borrowers. To ensure sustainability and reduce credit risks Sberbank creates an adequate allowance for loan impairment.

Sberbank of Russia now uses a conservative approach when planning long-term projects on development of business and convinces customers who quite often are experiencing any financial difficulties to resolve the matter with the bank employees that will solve the problem quickly and not bring the situation to a critical level. If one still see this situation occurs, then Sberbank of Russia will try to do best for all the participants of the problem, so that the bank and the client could find the solution with minimal losses.

For lending to legal entities in 2015, Sberbank of Russia has allocated the following principles. In the first place following sectors are to be supported by the Bank:

• Industry, which activities are aimed at meeting the basic important needs for the population (i.e. the funding of pharmacies, retailers, etc.);
• industry, serving the military-industrial complex;
• industry, which are addressing the challenges of society and the maintenance (this includes water and electricity, etc.);
• small business enterprises;
• enterprises of agriculture;
• maximum support to existing customers and borrowers of the Sberank within the previously concluded contracts.

Given the importance of work in front of customers and shareholders in this difficult time, Sberbank of Russia regularly introduces more specific measures to manage risk more effectively:

• changes the priorities of business clients, devotes all its attention to the activities in the particularly difficult conditions of the economy;
• increases the security of already received credits timely and appropriate cash flows from activity of the borrower;
• decreases the credit limit on the maximum debt load;
• requires to provide collateral of liquid assets;
• increases level of control by the Sberbank for mandatory and responsible behavior of managers and regulation through the introduction of additional restrictions on the activities of a customer of the borrower, including:
• the reduction of the limit on maximum load of debt;
• expanding the list of events that result in a premature discovery of the debt to the bank;
• introduction of more precise conditions for a cross-default under the obligations of the borrower to other creditors.

It should be noted that some types of loans were restructured by making changes in the original terms of the loan agreement more favorable to the borrower. While the bank’s bad loans suggest that a positive decision on the restructuring may be taken only in the presence of confirmed objective facts, such restructuring will continue to contribute to the normalization of the economic condition of the borrower and timely debt service in full.

An important area of improving practice of crediting of legal entities in the current situation should be improving the quality of assessment of collateral for loans. Assessment of the value of collateral is determined by the bank based on internal peer review by experts of the bank, assessment of independent appraisers, or on the basis of the value of the collateral in the financial statements of the borrower with the use of a discount.

In accordance with the policy of the bank, the value of the collateral or the amount of guarantees on loans to legal entities are required to cover the amount of the loan and interest accrued not less than three months. Borrowers shall maintain insurance of collateral or make additional payments on the loan in the absence of insurance. But in the current situation it’s necessary to more frequently monitor the quality of loans’ collateral.

Басс Александр Борисович,

Кандидат экономических наук, доцент, доцент кафедры «Денежно-кредитные отношения и монетарная политика»

In 2014 and the first half of 2015 significant deterioration of the main macroeconomic indicators that characterize the sharp deterioration of Russian domestic economy has taken place. In 2014, GDP growth was 0.6% instead of 2.5% for the first half of 2015, the decline in GDP was 3.5% in annual terms, and in the first quarter, the decline was 2.2%, in the second quarter down to 4.6%, respectively. If the first quarter of 2015, the crisis affected primarily non-industrial sectors: trade (-7,6%), financial sector (-3,9%), real estate transactions, business services (3.3 percent) and personal services (down 6.9%), in the II quarter total performance of GDP has been declining due to falling industrial production. [3]

In the second quarter of 2015 the fall in production of the main kinds of economic activity accelerated to 6.4% for the corresponding period last year – a decline of 2.8% in the first quarter. There is a significant reduction of investments in fixed capital. According to Rosstat, investments in fixed capital in Russia in July 2015 decreased by 8.5% compared with July 2014. In June of this year, investments have also decreased by 7.1% and 7.6% in May. Thus, for Jan-July 2015 investment fell by 5.9% compared to the same period of the last year. The Ministry of economic development predicts a drop in investments by 10.6% by the end of 2015. [3]

For the first time in recent years in Russia there was not only the decline of investment in fixed capital, i.e. in the acquisition of long term assets, but also the decline of investment in working capital. The latter circumstance indicates that entrepreneurs are negative about the situation not only in the long term, but also curtail current production. Related to this is the sharp growth of inflation: even according to official estimates of the Ministry of economic development, it will be significantly higher than in 2014, when it was 11.4%. [1] We deal not only with monetary inflation, depending on the costs, but with the reduction. This new factor now needs to be considered.

For comparison: during the crisis of 1998 greater impact on the economy was produced by external factors, such as the movement of capital and price changes. Therefore, the economy was able to quickly begin the recovery growth: that time in the Russian economy production capacity was under-utilised and high real unemployment was faced. Today the situation is quite different: the fixed capital is represented mainly by outdated equipment sufficiently loaded, and unemployment is relatively low. Accordingly, even the current depreciation of the ruble exchange rate (devaluation) does not lead to incentives for increased production.

The second half of 2014 has been bad for the Russian economy’s external environment. There is a drop in the value of exports and value of imports: foreign exchange inflows into the country are reduced. Capital outflow exceeds the surplus in the trade balance. This implies most likely further deterioration of the macroeconomic situation.

In 2014 and the first half of 2015 there was a decrease in real income, 2014th income decreased by 0.8% compared with 2013. The decrease in the level of real income in 2014 was observed for the first time since 1999. Systematically incomes of Russians began to fall from November 2014. In 2015, the decline in real income of households continued. So, for the first half revenues fell by 3.1% and in June by 3.5%.

Along with the decrease of the main macroeconomic indicators in the domestic economy are inflationary processes. Due to the devaluation of the ruble inflation in 2014 reached 11.4% instead of 5 % yoy. [1] Monthly inflation rates year-over-year in the first half of 2015 get more than 15%. During the first half of 2015 inflation reached 8.5% against 4.8% in the first half of 2014.
These indicators characterize the modern condition of the Russian economy as stagflation. Stagflation is a term used in modern macroeconomics to denote a situation in which the economic recession and the depressed state of the economy (stagnation and rising unemployment) is combined with rising prices — inflation. Stagflation is a relatively new economic phenomenon and in some ways paradoxical: up to 70-ies of XX century economic depression was accompanied by a decrease in prices – deflation.

This economic condition is related to the cyclical development of the national economy caused by the new conditions of the reproduction of capital. Currently it is present in several countries with developing economies, such as Brazil.

The specificity of the economic crisis in our country is the combination of recession and inflation, manifested as in suppressed (unmet demand) and in price forms. The destructive link between higher prices and lower manufacturing activity reveals itself in almost all spheres of economic life. What is happening to inflation and stagnation processes reinforce each other. Thus, the decline in production in most sectors was associated with an increase in prices of manufacturers and monopolists, for example, on the material resources for the agricultural sector.
Because of rising prices, largely associated with the increased costs, many companies compensate their financial losses from lower production volumes. At the same time, sustainable inflationary processes lead to inefficient reproduction, basically monopolistic production structures.

It is important to note that stagflation is due to the fundamental structural imbalances in the Russian economy and especially the prevalence of primary industries. Amplification of stagflation is largely due to lower production in the primary industries in the conditions of extremely slow progress in the efficient use of resources, the actual lack of innovation, inefficient pricing mechanism. [2]

High inflation, excessive regulation, the prevalence of state-owned companies and weak protection of property rights – the factors that lead to lower productivity and increase costs in Russia, says the report of the Central Bank. According to the IMF, the average inflation for 2005-2013 was 10.7%, prices grew stronger only in Ukraine and in Venezuela. The share of state-owned companies in certain sectors of the Russian economy reaches 80% and above in UAE (88%) and China (up to 96%). On the ease of doing business, Russia is at the 62nd place in the list of the world Bank.

First Deputy Chairman of the Central Bank of Russia Ksenia Yudaeva at the fifth Gaidar Economic Forum in 2014 stated that in Russia at the moment there is stagflation – a reduction of economic growth with a sharp increase in inflation, that it depends on inflation. While inflation is 15%, the key rate cannot be reduced even to the level of 8%. [3]

Therefore, we should begin to deal with inflation. And we have been doing it for 20 years, but the Central Bank never managed to do something radical, to reduce inflation to an acceptable level. We are the only country in the world, except Ukraine, where inflation never fell below 5%. [4]

The main cause of failures of the fight against inflation, in our view, is that we strain a market economy. In the Russian economy, 65% of all property belongs to the state. Share of the budget to GDP is 38%. State monopolies like Gazprom, Rosneft, Russian Railways, Rosatom, Aeroflot, AVTOVAZ, Sberbank, VTB will have priority in obtaining public funds, and receive resources from the national welfare Fund. In the Russian banking system 52% of the total capital of the system belongs to 5 banks, where the controlling stake is in the hands of the state. All this speaks of a very low level of competition in the domestic economy. Therefore, the attempt to reduce inflation-monetary methods, as the Central Bank tries without changing the structure of the economy, is doomed to failure. Moreover, it gives the opposite effect – dramatically reduces the growth rate of the economy.

To beat inflation, you need at least the program for three years by the President of the country, with large diversified measures from the government, Central Bank, state monopolies, and antitrust legislation. You need to set the task to reduce inflation in the first year to 8% in the second – to 5% and in the third year – up to 3%. Then it will be possible to radically reduce the rate of the Central Bank. [4]

Stagflation may take several years, if one would not undertake structural reforms now, in particular of indigenous measures for the transition to forced investment with an annual growth of at least 10%, would not introduce strong incentives for economic growth, would not reduce the key rate to 8% this year and 4% next year, would not take drastic measures to combat inflation, setting a goal – to bring it to at least 4-5% in 2016, and not to engage in serious institutional reforms, removing obstacles from the path of economic growth.

Bass Alexander Borisovich,

PhD in Economics, Associate Professor, Department of Monetary Relations & Monetary Policy

The Swiss Central Bank (SCB – Swiss Central Bank) in contrast to the respective banks of most European countries does not have the status of a public institution, and is a joint stock company with special status and is operated with the participation and under the supervision of the Confederation of Switzerland. It was organized as a joint stock company according to the results of a referendum held in 1906. The relevant law was adopted in the same year. The Swiss Central Bank has a monopoly right to issue the national currency and from 1907 issues the currency that is the Swiss franc (the coins are produced by Switzerland Mint). The Bank issues shares that are traded on the exchange market. Equity of Bank of Switzerland is 50 million Swiss francs. About 55% of its shares is owned by public entities. The remaining shares are traded on the stock markets. The Swiss Central Bank in accordance with p. 99 of the Constitution of Switzerland conducts an independent monetary and currency policy that serves the general interest of the country. [1] The main functions of a Swiss Bank:

1. The conduct of monetary policy to maintain price stability;

2. The implementation of a guaranteed offer of cash currency, has the privilege of printing banknotes.

3. The management of international reserves (which includes reserves of gold, currencies, instruments of international payments).

4. The stability of the financial system.

5. Non-cash payments.

6. Publication of statistical reports.

The most important task of the SCB is the conduct of monetary policy, which is to ensure price stability and that the economy is serving the interests of the country as a whole. The main instruments of monetary policy  of the Central Bank of Switzerland are the following:

1. The target range of the interest rate. The SCB conducts monetary policy by setting a target range for its three-month rate (the Swiss LIBOR rate). This range usually has a spread of 100 b.p. and is reviewed at least once per quarter. This rate is used as the target because it is the most important money market rate for investments in Swiss francs. Change of this rate due to changes in economic conditions are accompanied by clear explanations of the specific situation.

2. Operations on the open market.

REPO transactions – sale by the payee (borrower) of securities to the provider of money (the creditor) with a simultaneous agreement to buy back securities of the same kind and in the same amount at a later date. REPO transactions usually have very short maturities — from one day to several weeks. The SCB uses repo transactions to counteract undesirable movements of three-month LIBOR. To avoid exceeding the three-month LIBOR set level, the SCB provides commercial banks with additional liquidity through REPO transactions at lower rates and, in fact, creates additional liquidity. On the contrary, increasing REPO rates, the SCB can reduce liquidity or initiate the growth of three-month LIBOR.

The SCB conducts evaluations of monetary policy in March, June, September and December. Each of these ratings affect the interest rate decision and medium-term forecast level of inflation. The rationale of all decisions taken by the SCB is published in its press releases and quarterly reports. In addition, information about monetary policy of SCB is provided in press conferences of the Chairman of SCB governing Council, held annually in June and December. In recent developments of monetary policy one should include a waiver of the minimum fixed exchange rate for the Franc/Euro and reduced interest rates to minus 0.75%. [2]

In December 2014 SCB abandoned the minimum exchange rate for the franc per Euro 1,20 and reduced the interest rate to -0.75%. Thus, the target range of interest rates became negative. At the same time, an interest rate on account balances exceeding a maximum of 0.5 percentage points was reduced to minus 0.75%. This shifts the target range for three-month LIBOR rate to negative values between -1,25% and -0,25%. The minimum exchange rate of Franc/Euro was introduced in the period of the overvalued Swiss franc and uncertainty in the financial markets. It was an exceptional and temporary measure. And despite the fact that the franc is still high, the revaluation has generally decreased. The Euro has significantly depreciated against the dollar, and this caused a depreciation of the Swiss franc against the U.S. dollar. Given these conditions, the SCB concluded that enforcing and maintaining the minimum rate of the Swiss franc against the Euro is not justified. Lowering interest rates was in order to the termination of the minimum exchange rate that has not led to a tightening of monetary policy. And if necessary SCB will be active in the foreign exchange market to influence monetary policy. In the opinion of management of the Central Bank, price stability corresponds to the rate of inflation not higher than 2%. In the formulation of monetary policy of inflation and deflation the SCB focuses on private inflation forecasts. Base for the formulation of monetary policy are the forecasts for the medium-term inflation. Along with this, the SCB sets an operational target range of interest rates on three-month LIBOR.

In 2014 the Swiss Bank has revised its inflation forecast downwards by 0.1 percentage points to 0.0%. For 2015, the inflation forecast was negative and amounted to -0,1%. Only in 2016 is inflation expected to rise slightly by 0.3%. These projections assume that three-month LIBOR will remain at zero throughout the forecast horizon, and that the Swiss franc will weaken. Overall, the prospects of the world economy are still dominated by downside risks – the most important of which are the continuing difficult conditions in the Euro area and a possible escalation of geopolitical tensions. [1]

Figure 1 presents a forecast of  SCB at the time of December 2014, where the blue curve is the inflation rate until December 2014, the orange curve shows the inflation forecast as at September 2014 with LIBOR at 0.00%, and the red curve is the forecast for inflation as of December 2014 based on LIBOR at 0.00%. The calculation of this indicator was made as the annual change of the consumer price Index of Switzerland in percent. [3]

The graph shows that the forecast level of inflation in the long term increases, although the forecast in December was changed from September with more than a sharp rise in inflation in more than a slight increase in inflation. In mid-January 2015, the SCB abandoned the restrictions on the foreign exchange market, although still is calling the ceiling rate of national currency to Euro as one of the foundations of monetary policy.

Figure 1. Inflation Forecast of the Swiss Confederation as of December 2014.

Source: Switzerland National Bank.

This undermines the status of the franc as a reserve currency. The reason is the change in the global monetary policy (the Federal Reserve was planning on raising rates, the ECB and the Bank of Japan on the contrary – decrease). The SCB assumed that the ECB will announce a big program of government bond purchases, and supporting the franc in these circumstances, it would be very costly for the SNB. After the decision, the Euro initially rose to a record 85 centimes per Euro, then fell to 1,0245. Before that, for three years the “ceiling” of the franc to the Euro operated, amounting to 1.2 Swiss francs per Euro. Swiss producers lost 11-15% of capitalization. SMI stock index declined by 8.7%, during the session, the drop reached 14%. The SCB also lowered January interest rate on sight deposits to – 0.75% from minus 0.25% and has expanded the target range of the key rate – three-month LIBOR to minus 1.25 and 0.25 per cent to minus 0.75 is 0.25%. It should be noted that, although the franc to the Euro is still high, the overvaluation of the Swiss currency has decreased since the introduction of the “ceiling”. The economy has been able to take advantage that gave this phase, and to adapt to the new situation.

Thus, in our view, authorities of the Central Bank of Switzerland are conducting a very successful monetary policy, and the result is that inflation in the country is at a low level. In considering whether to adopt something or use in the practice of formulating monetary policy, the Central Bank of Russia should be borne in mind. First, it is necessary to consider the economic and political situation of a particular country. This means that the mechanisms used by the Central Bank of one country, most likely, would not be applicable for practice of the Central Bank of another country in the rate and direction of monetary policy. On the other hand, various technical features of decision-making, such as collegiality in course selection, public reports and open access greatly facilitate the understanding and comprehension by the population of actions that takes the Central Bank in the field of various policies. In this case, the use of foreign experience can be effective.