Russia: Reserve Requirements, 1998

During the 1998 ruble crisis, the Central Bank of the Russian Federation (CBR) relied on reserve requirements (RR) to bring stability to the ruble's exchange rate corridor and, over time, to inject liquidity into the frozen domestic banking system. First, in February 1998, the CBR unified the RR ratio on ruble and foreign currency liabilities to facilitate ruble financing. Second, after the devaluation of the ruble in August, the CBR lowered the RR ratio to provide liquidity to the banking system. Third, the CBR revised the computation of the RR ratio to provide relief to banks in an effort to restore the frozen payment system. Russia's RR policy, in concert with other liquidity measures, in particular multilateral clearing operations, succeeded in unfreezing the Russian payment system in late 1998. The CBR began to raise RR ratios in mid-March 1999 in response to rising inflation. However, some argue that the regulatory forbearance surrounding CBR liquidity assistance allowed banks to act imprudently, contributing to an erosion of public trust in the Russian financial system. Over the reserve requirement easing period, from the beginning of August until the beginning of December, balances of RR accounts decreased from RUR 37.3 billion (USD 6 billion) to RUR 19 billion, reflecting the liquidity injected through these measures.