The new team headed by Sergei Ignatyev looks willing to take a more active line in managing and improving Russia's financial system. It wants to create a system similar to the one in the United States, where financial markets react to even the slightest change in the Federal Reserve System's benchmark rate as a major event.

One of Ignatyev's first steps after taking office was to reduce the Central Bank's refinancing rate from 25 percent to 23 percent. Most analysts view the reduction as a political rather than an economic move. The government wants to encourage loans for the real sector of the economy, and in this respect, the reduction in the Central Bank's refinancing rate is a welcome shift.

At an Internet conference organized by the Finance-Analytic investment company, analysts didn't all agree on the meaning of the Central Bank's refinancing-rate reduction policy.

Some analysts said it was a token act by the Central Bank, like most of the previous reductions. But Oleg Solntsev, an expert with the Center of Macroeconomic Analysis and Forecasts, said the Central Bank's decision to reduce the refinancing rate was a reasonable step.

"If the Central Bank is serious about refinancing the banking sector, it should reduce the refinancing rate further in the near future," Solntsev said. "Even after the reduction, the rate will still be 23 percent per year. Correcting for the inflation rate, expected to be 12.5 percent to 14 percent this year, will further reduce the figure to 9 percent to 10.5 percent."

But, Solntsev said, even after the reduction the interest rate is still unbearably high, especially if one takes into account that the recipient bank needs to have a margin. Ultimately, the Central Bank's refinancing rate for commercial banks, corrected for inflation, should be around zero. Of course, this does not mean the rate would be reduced to this level overnight since neither the Central Bank nor the commercial banks are ready for it.

"But this is the ultimate goal," Solntsev added.

Galina Kovalishina, an expert with the Institute of Financial Studies, warned against underestimating the danger that lies in the Central Bank's manipulations with refinancing rates. A 2 percent rate reduction will neither stimulate commercial banks to reduce their loan rates nor encourage them to increase crediting volumes.

Monetary authorities have been approached about dropping the refinancing rate, and thus pushing down crediting rates on the market. Greater availability of low-rate loans from commercial banks would encourage the flow investment that industry desperately needs to finance its modernization programs, Kovalishina said.

"First, the Central Bank should really begin crediting commercial banks at the refinancing rate. Otherwise, the refinancing rate will remain only a benchmark for the Central Bank," she added.

Especially interesting in this context is the position of the newly appointed first deputy chairman of the Central Bank Oleg Vyugin, who is responsible for the bank's lending and monetary policies. Shortly before he was appointed, Vyugin granted an interview to the Internet daily Gazeta.ru, where he outlined his views on how the Central Bank should make more effective use of the refinancing rate.

According to Vyugin, the Central Bank's refinancing rate is not playing a regulating role in Russia today.

"Normally, the Central Bank should determine the cost of borrowing. The Central bank is the ‘ultimate' creditor, and the whole banking system has no choice but to accept its conditions because all banks are its debtors in one way or another. If, for example, the Central Bank issues loans at a 10 percent annual rate, this rate is accepted as the cost of borrowing and is recognized by commercial banks and the whole financial sector. In Russia, things are the other way around," he explained.

If commercial banks want to deposit money with the Central Bank, they might be more cautious if they find the interest rate too low. In other words, cash liquidity is regulated by the commercial banks, while the interest rate on deposits offered by the Central Bank to the commercial banks serves as the cost-of-borrowing indicator.

The Central Bank sets its interest rate on deposits to absorb some liquidity from the banking system. Currently, the annual rate is 14 percent on the longest-term deposits. Commercial banks can deposit their money in the Central Bank at this rate, but they use their own discretion to decide what is better: to deposit money in the Central Bank or to buy foreign currency. Therefore, the cost of borrowing is determined by the market and not by the monetary authorities."

According to Vyugin, the problem may be resolved through creating a stabilization fund where superfluous export earnings could be frozen or directed to foreign debt servicing.

"Once this mechanism begins to work, the Central Bank would be able to limit its offer to longer term deposits thus depriving the commercial banks of the opportunity to use the Central Bank for short-term money placement. As for current liquidity, it could be regulated by means of open market operations, like direct and inverse REPO operations," Vyugin said.

He stressed that the Central Bank should be both persistent and consistent in its efforts to resolve financial problems. By and large, the Russian stock market positively appraises the arrival of the new team in the Central Bank, primarily from the viewpoint of reforms, and these appraisals translate into growth for Russian stocks.

(The author is Moscow-based freelancer specializing in economic issues)