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The U.S. Federal Reserve last week said it would begin reducing the amount of money it pumps out every month, leading investors to pull out of high-yielding assets and central banks in emerging markets to act to stem currency slides.
Russia's central bank may also face a dilemma as it moves to inflation targeting and aims to make the rouble float freely by 2015. Capital outflows may prompt it to counteract the weak rouble by letting interest rates rise, or to allow the rouble to depreciate but risk higher inflation - which could hurt companies with high debt.
"Although interest rate risks of non-financial organizations as a whole are limited, a rise in the level of interest rates may lead to a significant reduction in the financial stability of most indebted enterprises," the central bank said.
Indebted Russian metals and mining companies which have been affected by a growth slowdown in China and stagnation in crisis-hit Europe include Rusal (>> United Company Rusal Plc) and coal miner Mechel (>> Mechel OAO).
Higher interest rates may hurt companies' profitability and make it harder for them to service foreign debt, which grew by over 20 percent in the first 10 months of 2013 to $640 billion, the central bank said.
It could also cause a decline in banks' combined capital adequacy ratio (CAR), which is required to be a minimum of 10 percent, although the banking system as a whole is resilient, it said.
The central bank estimates that any dramatic reaction to the Fed tapering - such as a 25 percent fall in Russian stocks, a 200 basis point rise in the sovereign debt yield or a 350 basis point rise in corporate debt yields - could see a decline in banks' CAR to 12.1 percent from 13.4 percent.
Russian banks could be hurt by higher interest rates, with investments in debt securities amounting to 11 percent of total banking system assets as of September 1.
The central bank also saw little possibility that the cost of credit would rise to the level that would hit companies profitability and cause net losses.
Companies would dip into net losses in a crisis situation if the sovereign debt curve moved up 600 basis points, lifting banks' interest rates on loans to companies to 19 percent from 10 percent.
"Russia's position in relation to sovereign and private debt risks is quite stable," Russia's central bank said in its quarterly review on Tuesday.
OIL SUPPORT
Russian assets have not been as hard hit as those in other emerging markets by the reduction in U.S. money printing, because high prices for oil, Russia's main export, are helping to keep the country's structural current account in surplus and the public finances in balance.
But falling commodity prices, stagnant exports and growing indebtedness make the Russian economy, which is growing at the slowest pace in four years, more exposed to an increase in global interest rates.
"Changes in basic interest rates and market expectations may lead to a significant reduction in the value of emerging market assets," the central bank said.
Another channel that could bring distortions into the Russian economy from foreign investors fleeing that market is interest swap operations. Foreign investors play a key role on that market, using interest rate swap and currency swap operations to get exposure to the rouble.
The aggregate market volume of interest swaps was 4.1 trillion roubles ($124.3 billion) by October. Losses at Russian banks using interest swap operations would not exceed 10 billion roubles if the rouble fell by 30 percent and interest rates grow by 200 basis points.
"Potential losses on the interest rate channel are moderate," the central bank said.
(Reporting by Oksana Kobzeva, writing by Maya Nikolaeva; editing by Megan Davies)
By Oksana Kobzeva and Maya Nikolaeva
