Comparative analysis of US and Russian Economy

1. Financial Intermediation and
Commercial Banking
Comparison between a mature and transition economy
Mature Economy – USA
Transition Economy - Russia
Kuldeep Trivedi
18125019

2. Mature Economy
•USA
Transition Economy
•Russia

3. The Glass-Steagal act
holds a key position in
the American economy
as it established various
institutions and
governing regulations
They have separate
securities, commodities
and insurance
regulatory agencies. In
some states they have
their own banking laws.
Banking in USA is
regulated at both the
federal and the state
levels.

4. USA
• Largest Economy in terms of volume, largest by nominal GDP and second largest in terms of PPP
• Primary reserve currency of the World
• Free market- mostly market economy, but is said to be mixed of both private and government share
• Diversified and the world’s leading industrial sector
• World’s largest trading nation and consumer market
• Nominal GDP of USA stood at $21.5 trillion(highest)
• Unemployment is as low as 3.7%
• Largest producer of oil and natural gas
• Highest household and employee income
• 8th rank in ease of doing Business Index
• Highest net migration rate in terms of labour supply

5. Central Bank – Federal Reserve of USA
Regulating agency i.e. the Federal Reserve uses various tools to implement the policies. Federal
Reserve acts as the lender of last resort that is when there is a panic situation it helps the banks to
keep them lending, so it may be called performance oriented thing.
There are 3 levers employed by the Federal Reserve to control the money supply
•
Open market
operations
Reserve
requirement
Changes in
discount rate

6. Open Market Operations
• Purchase and sale of securities in the open market
• It is basically specified by federal open market committee. Target is to keep the fund rates as
decided by them by changing the supply of reserve balances. After Global financial crisis they
have tried to keep the fund rates near zero, have maintained long term securities and put
pressure on long term interest rates.

7. Discount Rate
• Interest rate that is charged by federal reserve on the commercial banks and
other depository institutions
• 3 discount window programmes
Primary (very short duration, Interest
rates >> Short-term interest rates)
Secondary (Short-term, Secondary
Credit Rate >> Primary Credit Rate)
Seasonal one (Small depositors recurring needs throughout the
year such as that of agriculture, Average of selected market rates)

8. Monetary Policy
• Goals:-
• Maximum employment
• Stable Prices
• Moderate long term interest rates
How they do it??
• Managing short term interest rates
• Ensuring low Credit cost and its availability
Long Term Achievable Goals
• Stable
• interest rates
• Price of Equities
• Currency exchange rates

9. Money Supply

10. Reserve Requirements
• It is determined by applying the reserve ratios specified in the Federal Reserve
Board's Regulation D to an institution's reservable liabilities. It consist of net
transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities.
Reserve ratio depends upon the amount of net transactions that are being done
throughout the year.

11. Interest on Required Reserve Balances and Excess Balances
• Financial services regulatory act in USA authorises its central bank to pay interest
on balances held by on or behalf depository institutions at Federal Reserve
subjected to the regulations of board of governors. IORR (Interest rate on
required reserves is determined by board and it effectively eliminates the implicit
tax.
Overnight Reverse Repurchase Agreement Facility
• It is a supplementary tool used to control the federal funds rate and achieve its
target. Basically what it does is it sells the securities to the counterparty for a day
and the next day it buys it back. So, that results in a reduction in the reserves in
the liability side of the balance sheet which then proceeds to increase in the
reverse repo obligations while the trade is outstanding. ON RRO offering rate is
being used in the transaction which is the maximum interest rate which the
Federal Reserve is willing to pay in On RRP operation.

12. Term Deposit Facility
• It manages the aggregate quantity of the reserve balances held by
depository institutions. It drains reserve balances from the banking system,
offers deposits through the term deposit facility
Expired Policy Tools
• Several policies were created and then closed in the meantime when they
are not of much significance and use. It was the case when recession
happened and to provide liquidity to the borrowers several institutions
were opened and then after that when they were of no utility they were
closed. Some of the prominent ones were the asset backed commercial
paper money market mutual fund liquidity facility (ABC MMMF), the
commercial paper funding facility and many more are there.

14. Russia
• Mixed and Transition Economy
• Nominal GDP stood at $1.579 trillion
• 30% of world’s natural resources. Net worth of Russia’s natural resources is
$75 trillion
• Largest exporter of natural gas and second largest exporter of petroleum
• Large and sophisticated arms industry
• 35th rank in ease of doing business index
• Unemployment stands at 4.5% in 2018
• Uneven GDP in terms of geographic region of the country with Moscow
region contributing most of it

15. The monetary policy of Russia is governed
by the Central bank of the Russian Republic
and basically it is aimed at well-being of
Russian citizens. Basically Russia being a
socialist state, it has an economy mostly
controlled by the state. .It is aimed at
controlling the inflation and maintaining a
sustainably low inflation, the target being
around 4%. The main parameter for
deciding the policy for them is through
controlling the paramount parameter for
them i.e. the Bank of Russia Key Rate
GDP growth is mostly dependent on private
consumption in Russia. Its basic aim as an
emerging market economy would to grow
the percentage of investment as a
percentage of GDP which was around 21-
22% recently but it was far less than what it
should be
The Russian financial markets are basically
under-developed for a country of the size of
Russia

16. Credit Rating
• Russia’s credit rating is Baa3 with stable outlook. The last 2 years
credit rating of Russia by different credit rating agencies is as follows

17. Money Supply

18. • The below table shows how prices have been controlled by the
central bank of Russia. Their inflation rate has been in decrease trend
and CPI has increased in this quarter. This shows us the buying
capabilities of the citizens of Russia.
•

19. Flaws
• It lags behind because of the structural legacies that it carry from the
past as well as institutional weakness of its financial institutions.
• Equipment leasing deals are around 10-19% which is also a very big
value as it is a thing on which business depends on in the starting and
as the operations continues to create a higher long term value.
• CBR or central bank of Russia is in charge of Russia’s national currency
stability. It has many functions including controlling the Russia’s
international reserves, controlling official exchange rates, monetary
and the government budget.

20. Currency Exchanges
• Transactions are not allowed in any other currency other than the ruble
between the Russians and it can happen between a Russian and any other
national. They should strictly adhere to the rules, regulations and
legislations that has been associated when a transaction happens between
a resident and a non-resident. Currency is mostly controlled by the federal
tax service and federal customs service and it has seen many changes in
the recent past.
• Currency became convertible in 2006 when restrictions were abolished on
cross-border transfers.
• Russian security market is in the hands of a Moscow exchange. Trading
happens on this platform in the form of bonds, equities, derivatives,
currencies both domestically as well as internationally. Foreign currency
trading takes place through MICEX-RTS.

21. • The below table shows us that at once the Govt debt/ GDP was
around 92.1% which is one of the highest but they have improved
over the years.
•

22. Capital Market
• Due to fragmented banking market liquidity is unevenly distributed among
the banks. The share of borrowings in the 30 big banks is around 63% in
the Russian economy.
• Russian capital market consists of the corporate bonds and equity markets
• Specific characteristics of Russia’s financial system structure have been
molded by a number of factors, including households’ low activity in the
financial market, the shift of their likings towards obtaining services from
credit institutions that provide not only banking services but also services
in the stock market, as well as by the low level of confidence in the non-
bank financial institutions.