Open-market Operations

*The CBR conducts open-market operations and has now acquired a large portfolio of federal securities. This constitutes indirect lending to the government; direct lending is prohibited. The IMF puts limits on this indirect lending, but there is nothing in domestic legislation, which regulates this practice. Last year, the CBR kept its stock of lending to the finance ministry unchanged and, therefore, provided no direct financing on the margin to the government. However, the CBR acquired RUR23trn of securities -almost certainly government rouble securities such as T-bills -taking holdings to nearly RUR59trn. Some of this acquisition of securities could reflect the exchange of new finance-ministry securities in cancellation of part of the finance-ministry's historic debt to the CBR. This suggests the CBR could hold as much as 25% of the stock of RUR237trn of GKOs and OFZs issued at end-1996 and is a major player on the primary and secondary markets in government securities. As the government's banker, it would presumably be obliged to strive to meet the objectives of its client with respect to the quantity and cost of the securities the government issues and to secondary-market conditions.

Central Bank of the Russian Federation

RURtrn	1 Jan 1996	1 Dec 1996	change
Assets
Gold	11,6	29.8	156
Foreign exchange	82.8	88.6	7
Vault cash	0.1	0.9	580
Credits to Min Fin	58.4	58.7	1
Securities	35.7	58.9	65
Other credits	15.0	10.3	-32
Int'l settlements	5.4	4.4	-28
Other	16.4	55.3	238
Total	225.5	307.0	36
Liabilities
Authorised capital	3.0	3.0	0
Reserves and funds	26.9	25.7	-5
Foreign exchange	11.4	19.6	73
Cash	83.5	101.2	21
Commercial banks	35.5	41.0	16
Budget funds, etc	18.4	17.3	-6
Funds in settlement	6.0	5.5	-9
Other	43.9	96.8	121
Total	225.5	307.0	36

Note: The CPI rose by 20% from December 1995 to November 1996.

Monetary and Exchange-Rate Policy Central-bank Policy

The primary responsibility of the Central Bank of Russia is the stability of the currency:

'Protecting and ensuring the stability of the rouble shall be the principal function of the Central Bank of the Russian Federation, which it shall discharge independently from other bodies of state authority (Article 75 of the constitution passed in December 1993).

*The CBR's monetary policy is also determined by its obligations as a co-signatory to the CBR/government memorandum on monetary, financial and economic policies to the IMF in relation to the extended financing facility agreed by the IMF in March 1996 and in April 1997. Following most countries' lead, Russia has not published its agreements with the IMF, although it (but not the IMF) is free to do so. We believe the agreement includes upper limits on CBR credits (including indirect credits through secondary-market purchases of government securities) made to the government and on CBR net domestic assets (which are equivalent to loans to the domestic sector). These ceilings have the ultimate aim, according to IMF models, of reining in inflation by controlling the extension of credit and broad-money creation. The ceiling on CBR credits to the government should be consistent with the government's fiscal policy as agreed with the IMF. We believe there are also other limits, eg, a ceiling on the budget deficit and a floor on budget revenues. This would normally be within the context of targets (but not contractual obligations) for inflation and understandings about the exchange rate.