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Russia’s two largest banks plan SWIFT alternative

Elite Forex Blog - Market Research & Analysis
The two biggest banks in Russia, Sberbank and VTB, are in talks to create an alternative to the SWIFT global system for interbank financial communications, VTB head Andrey Kostin said.
According to Kostin, Russia has two options: either use the system run by the Russian Central Bank or create a new homegrown transaction platform.
“There is an alternative, we can use the Central Bank system that is already in operation, and we may make our own, we are already in discussions with Sberbank,” Kostin told reporters in Washington DC, where he is for the annual fall meetings of the International Monetary Fund (IMF) and World Bank.
However, the catch with the Central Bank’s international transaction system is the price.
“It’s expensive, in fact several times more expensive than the SWIFT payment system,” the VTB head said.
“If we create our own interbank system, which isn’t difficult at all and we are in the process of doing, it will be cheaper. And then hold talks with the Central Bank,” Kostin said.
Switching Russia off SWIFT, the Society for Worldwide Interbank Financial Telecommunication, would instantly isolate it from global finance, as happened with Iran in 2012. According to reports, EU leaders, especially in Britain, were discussing the option as a sort of super sanctions to punish Russia for its involvement in the Ukraine crisis. Many US senators have also been pushing to block Russia from SWIFT payments.
SWIFT, the Brussels-based global payments system, said last week that they wouldn’t succumb to political pressure and cut Russian payments and would continue services. The group said that disconnecting Russia violates the company’s mission and that it doesn’t make such unilateral decisions.
However because it’s based in Brussels, it would have to comply with any greater EU ruling.
Last month the SWIFT system transmitted more than 21 million financial messages a day between more than 10,500 financial institutions and corporations in 215 countries.
The Russian National SWIFT Association, or ROSSWIFT for short, is the second biggest worldwide, after the US.

http://rt.com/business/195472-russia-sberbank-vtb-swift/ 

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“Prepare For Runs”, IMF Warns Policymakers Of “Elevated Financial Stability & Liquidity Risks”

Elite Forex Blog - Market Research & Analysis
The extended period of monetary accommodation and the accompanying search for yield are leading to credit mispricing and asset price pressures, increasing the chance that financial stability risks could derail the recovery.
 [6]
Concerns have shifted to the shadow banking system, especially the growing share of illiquid credit in mutual fund portfolios.
Should asset markets come under stress, an adverse feedback loop between outflows and asset performance could develop, moving markets from a low- to a high-volatility state, with negative implications for emerging market economies.
 [7]
Funds investing in credit instruments have a number of features that could result in elevated financial stability risks.

First is a mismatch in liquidity offered by investment funds with redemption terms that may be inconsistent with the liquidity of underlying assets. Many credit funds hold illiquid credit instruments that trade infrequently in thin secondary markets.

Second is the large amount of assets concentrated in the hands of a few managers. This concentration can result in “brand risk,” given that end-investor allocation decisions are increasingly driven by the perceived brand quality of the asset management firm. Sharp drawdowns in one fund of an asset manager could propagate redemptions across funds for that particular asset manager if its brand reputation is damaged, for example through illiquidity or large losses.

Third is the concentration of decision making across funds of an individual fund manager, which can reduce diversification benefits, increase brand risk, or both.

Fourth is the concentrated holdings of individual issuers, which can exacerbate price adjustments.

Fifth is the rise in retail participation, which can increase the tendency to follow the herd.

These features could exacerbate the feedback loop between negative fund performance and outflows from the sector, leading to further pressure on prices and the risk of runs on funds. These risks could become more prominent in the coming year as the monetary policy tightening cycle begins to gain traction.
 [8]
Such stress might be triggered as part of the exit from unconventional monetary policy or by other sources, including a sharp retrenchment from risk taking due to higher geopolitical risks.
And, as we have discussed numerous times previously, less liquidity is available from traditional liquidity
providers…
 [9]
The IMF is worried…

Policymakers and markets need to prepare for structural higher market volatility. Doing so requires strengthening the system’s ability to absorb sudden portfolio adjustments, as well as addressing structural liquidity weaknesses and vulnerabilities.

Advanced economies with financial markets at risk for runs and fire sales may need to put in place mechanisms to unwind funds should they come under substantial pressure that threatens wider financial stability.

Source: IMF

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Swiss National Bank Explains Why It Is Against Repatriating Gold

Elite Forex Blog - Market Research & Analysis
The Swiss National Bank has lashed out at the so-called “gold initiative” efforts to “Save Our Swiss Gold” unsurprisingly proclaiming it as a bad idea. AsRon Paul previously noted, “The gold referendum, if it is successful, will be a slap in the face to those elites,” and so the full-court press ahead of the Nov 30th vote has begun (a la Scotland fearmongery) as SNB Vice Chairman Jean-Pierre Danthine explains how a ‘yes’ vote for the initiative“would severely constrain the SNB’s room for manoeuvre in a future crisis,” as it “poses danger to the conduct of a successful monetary policy.” His reasoning (below) is stunning…
On 30 November, the Swiss electorate will vote on the so-called “gold initiative” (“Save our Swiss gold”, in full), which, paradoxically, would severely constrain the SNB’s room for manoeuvre in a future crisis. Let me digress for a few minutes to explain why the SNB is opposed to this initiative.
The initiative is calling for three things:
first, the SNB should hold at least 20% of its assets in gold;
second, it should no longer be allowed to sell any gold at any time; and
third, all of its gold reserves should be stored in Switzerland.
Let me address the last point first. Today, 70% of our gold reserves are stored in Switzerland, 20% are held at the Bank of England and 10% at the Bank of Canada. As you know, a country’s gold reserves usually have the function of an asset to be used only in emergencies.
For that reason, it makes sense to diversify the storage locations. In addition, it makes sense to choose locations where gold is traded, so that it can be sold faster and at lower transaction costs. The UK and Canada both meet that criterion. In addition, they both have a strong and reliable legal system and we have every assurance that our gold is safe there.
The initiative’s demand to hold at least 20% of our assets in gold would severely restrict the conduct of monetary policy. Monetary policy transactions directly change our balance sheet.
Restrictions on the composition of the balance sheet therefore restrict our monetary policy options. A telling example is our decision to implement the exchange rate floor vis-à-vis the euro that I mentioned above: with the initiative’s legal limitation in place, we would have been forced during our defence of the minimum exchange rate not only to buy euros, but also to buy gold in large quantities. Our defence of the minimum exchange rate would thus have involved huge costs, which would almost certainly have caused foreign exchange markets to doubt our resolve to enforce the rate by all means.
Even worse consequences would result from the initiative’s proposal to prohibit the sale of gold at any time. An increase in gold holdings could not be reversed, even if necessary from a monetary policy perspective. In combination with the obligation to hold at least 20% of total assets in gold, this could gradually lead the SNB into a situation where its assets would mainly consist of gold: each extension of the balance sheet for monetary policy reasons would necessitate gold purchases, but whenever the balance sheet needed to be reduced again for the same reasons, we would not be able to resell our gold holdings. This would severely restrict our room for manoeuvre.
Furthermore, because gold pays no interest or dividends, the SNB’s ability to generate profits and distribute them to the Confederation and the Cantons would be impaired.
As a final point, note that currency reserves which cannot be sold are not truly reserves. It does not make sense to call for an increase in emergency reserves – gold holdings – and simultaneously prohibit the use of these reserves even in emergencies.
The SNB’s overriding objection to the gold initiative stems from the danger it poses to the conduct of a successful monetary policy. It would severely impair the SNB’s ability to fulfil its constitutional and legal mandate to ensure price stability while taking due account of economic developments, in the interests of the country as a whole.
*  *  *
We will hazard a guess that the voting will go exactly as Scotland’s independence vote went – young vote for it, old against it… as fearmongering status quo managers step up the propaganda with no regard for what happens next.
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Russia Spends Up to $1.75 Billion in Two Days to Buoy Ruble

Elite Forex Blog - Market Research & Analysis
Russia’s central bank spent as much as $1.75 billion to prop up the ruble over the last two trading days, its biggest market intervention since President Vladimir Putin’s incursion into Ukraine in March.
Russia’s central bank spent the equivalent of $980 million to shore up the ruble on Oct. 3, the latest data on the authority’s website showed today. The bank also said it shifted the upper boundary of the currency’s trading band by 10 kopeks yesterday, a move that may have involved spending between $420 million and $769 million that day. The exchange rate weakened 0.3 percent to 44.6234 versus the basket by 5:12 p.m. in Moscow, set for a record low for the fourth time this month.
Putin is suffering the consequences for shaking up the post-Cold War order in eastern Europe as the U.S. and European Union impose sanctions on his economy and investors pull money out of the country. Demand for dollars and euros is growing among Russian companies locked out of western debt markets as they contend with $54.7 billion of debt repayments in the next three months, according to central bank data.
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Russian Central Bank rejects capital controls as ruble hits lowest level since 1998

Elite Forex Blog - Market Research & Analysis
The ruble slid to a new record low of 39.71 against the dollar Tuesday. The Russian Central Bank has been quick to quash fears it would re-introduce capital controls to limit the amount of foreign currency purchases, or even moved outside the country.
“Bank of Russia is not considering the introduction of any restrictions on cross-border capital flows as it was reported in some publications in the mass-media,” the bank said in a statement on Tuesday evening.
The bank’s statement followed a report by Bloomberg News citing anonymous officials that the bank is considering imposing capital controls, as the ruble hit new historic lows.
The Central Bank said it would intervene once the euro-dollar currency basket against the ruble reached a level of 44.4, which it reached on Tuesday before quickly retreating.
Capital controls are a monetary tool by Russia’s key lender to restrict money flowing overseas, which in Russia is projected to reach $100 billion in 2014, nearly on par with the $120 billion that fled in 2008 when the financial crisis hit. In 2007 Russia had a positive net capital inflow.
Andrey Kostin, Chairman and CEO of VTB, doesn’t believe that Russia will impose capital controls just yet, talking to CNBC at VTB’s annual investment forum ‘Russia Calling!’.
“The basic issue now is whether the Russian leadership, under the circumstances, will switch to the model of a mobilization economy, and introduce the old mechanism of currency control, or they will stay on the principle of their open market economy. I think that is the big question that will be asked tomorrow,”Kostin said.
Russia repealed capital controls in 2006, however last week Central Bank Chairwoman Elvira Nabiullina said that Moscow would consider “non-standard” mechanisms to ensure economic stability.
Capital controls aren’t the only monetary tool the Central Bank could consider. If the ruble continues to weaken, it may decide to re-start currency interventions, pumping in billions of dollars to artificially prop up the currency. This would be a policy reversal for the bank, which has recently loosened its monetary controls in order to make the overvalued ruble free floating by 2015.
“Never say never, but not at this stage, definitely,” the VTB CEO said when asked if capital controls are on the horizon.
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