2.5. Foreign exchange regulation and foreign exchange control Improving accounting and reporting 43

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1 APPROVED Edict of the President of the Republic of Belarus No. 206, dated May 11, 2015 REPORT of the National Bank of the Republic of Belarus for 2014 Minsk

2 2 Contents Introduction 4 Chapter 1. Economic and financial situation in the Republic of Belarus Macroeconomic conditions of monetary policy implementation 5 and banking sector development 1.2. The balance of payments and gross external debt Financial sector Banking sector Institutional characteristics Structure of banks assets and liabilities Effectiveness and sustainability of the banking sector Financial market Foreign exchange market Interbank credit market Deposit and credit markets interest rates Government securities market Corporate securities market Bank management funds 21 Chapter 2. National Bank s activities Monetary policy Exchange rate policy Interest rate policy and bank liquidity regulation Key monetary indicators Supervision of banks activities Streamlining regulatory legal framework for banking Off-site supervision Audits of banks Streamlining regulation of banking operations Participation in the development of regulatory legal acts and 30 banks local documents on credit and deposit markets Development of the system for non-cash settlements of retail 33 payments Streamlining regulation of non-cash settlements Formation of credit histories and provision of credit reports Improving regulation of non-bank operations Regulation of leasing activities Regulation of microfinance organizations activities Foreign exchange regulation and foreign exchange control Improving accounting and reporting 43

3 Cash circulation Payment system Development of the single settlement and information space IT development Improving financial literacy of population International cooperation Staffing and staff training Internal audit 55 Chapter 3. Financial statements Assets of the National Bank Liabilities of the National Bank Capital of the National Bank Income and expenses of the National Bank 58 Forms of annual financial statements 59 Conclusion 67 Attachments Tables, figures, and schedules of the implementation of the Republic of Belarus Monetary Policy Guidelines by the 68 National Bank in 2014, to Chapter Tables, figures, and schedules of the implementation of the Republic of Belarus Monetary Policy Guidelines by the National Bank in 2014, to Chapter 2 83

4 4 Introduction The Report of the National Bank for 2014 was prepared in accordance with Article 46 of the Banking Code of the Republic of Belarus (hereinafter the Banking Code ). In 2014, the monetary policy of the Republic of Belarus as part of the unified economic policy was implemented in line with the Monetary Policy Guidelines of the Republic of Belarus for 2014 approved by Edict of the President of the Republic of Belarus No. 586 dated December 31, 2013 (National Legal Internet Portal of the Republic of Belarus, January 1, 2014, 1/14719) (hereinafter the Guidelines for 2014 ) having regard to the current macroeconomic situation. The National Bank s activities in 2014 were aimed at attaining the main monetary policy targets and performing the functions of the central bank assigned thereto by legislation of the Republic of Belarus.

5 5 Chapter 1 Economic and financial situation in the Republic of Belarus 1.1. Macroeconomic conditions of monetary policy implementation and banking sector development In 2014, the economic growth was assured at the expense of maintenance of consumer demand at a rather high level and improvement of the situation in the field of potash fertilizers production. In the year under review the economic growth was concentrated in retail and wholesale trade, as well as in the chemical and mining industries. A negative impact on the stability of the economy was made by the external factors related to the slowing-down of the economic growth and depreciation of the national currencies in the countries which are main trade partners of the Republic of Belarus, primarily, in the Russian Federation. In the year under review, the volume of Gross Domestic Product (hereinafter GDP ) amounted to BYR778.5 trillion, having increased (in comparable prices) by 1.6% on the 2013 level (in 2013, by 1%). GDP energy intensity dropped by 1% (in 2013, by 11.1%) (Attachment 1.1). Retail turnover (in comparable prices) increased in 2014 by 6.6% compared with 2013 (in 2013, by 18% on a year earlier). Households real wages grew in 2014 by 0.3% (in 2013, by 15.8%); real disposable money income by 0.1% (in 2013, by 16.3%). Investment in fixed capital decreased (in comparable prices) by 9.1% on a year earlier (in 2013, grew by 9.3%). The annual volume of investments in fixed capital totaled BYR213.5 trillion; their share in GDP 27.4% (32.3% in 2013). In the technological structure of investment in fixed capital the expenditures for construction and installation works (55.4%) were dominating, while investments in assets (machinery, equipment, and vehicles) amounted to 32.9% and other works and costs 11.7% of the total volume of capital investments. In 2014, investment in fixed capital at the expense of the budgetary funds decreased (in comparable prices) by 39.7%, at the expense of local budgets by 17.5% (in 2013, it grew by 52.6% and 30.6% respectively). The share of budgetary resources in the structure of investments in fixed capital dropped versus 2013 up to 21.2%, amounting to 16.4%. In the year under review, organizations own funds and credit resources prevailed in the financing of investment activities. Organizations own funds

6 6 and banks credits accounted for 64.5% of all capital investments (in 2013, 62%). According to the data provided by the National Statistical Committee, the total volume of used credit resources, including foreign credits and credits granted under foreign credit lines, amounted in 2014 to BYR57.5 trillion. Industrial output grew in 2014 (in comparable prices) compared with 2013 by 1.9% (in 2013, dropped by 4.9%). Finished stock at the enterprises warehouses amounted as at January 1, 2015 to BYR32.7 trillion, having risen by 10.1% since the beginning of the year. With respect to the monthly average volume of production it amounted as at January 1, 2015 to 75.8% compared with 74.5% as at January 1, Agricultural output went up in 2014 (in comparable prices) by 3.1% compared with 2013 (in 2013, dropped by 4.2%). Transportation of cargo (excluding pipeline industry) grew by 1.3% (in 2013, dropped by 2.2%). Cargo turnover (excluding pipeline industry) went up by 3.3% (in 2013, dropped by 4.3%). Passenger turnover went down by 6.2% (in 2013, grew by 5%). Financial situation of non-financial organizations was characterized in 2014 compared with 2013 by the improvement of a number of financial indicators (Attachment 1.2). Revenues from the sale of products, goods, works, and services amounted in 2014 to BYR1,420 trillion, including per one average worker on establishment BYR651.2 million, having grown in nominal terms by 11.4% compared with Profit from the sale of products totaled BYR100.8 trillion, a 20.4% growth (in nominal terms) compared with Net profit grew by 14.5%; profit before tax by 14.1% The real values of profit from the sale of products went up, while the indicators of revenues from the sale of products, goods, works, and services, as well as of net profit went down. Due to the outstripping growth of profit from the sale of products over that of revenues and cost of products sold the return on sales went up from 6.6% in 2013 to 7.1% in 2014; return on sold products from 8.2% to 8.9% respectively. The share of loss-making and low-return enterprises (in terms of return on sales) grew in 2014 to 57%. In 2014, 1,088 organizations (13.5%) were in the red compared with 827 organizations (10.3%) in The amount of net losses grew 1.8 times. In 2014, the amount of net loss per one organization in the red in the republic on average totaled BYR15.8 billion (in 2013, BYR11.6 billion). Budgetary policy in 2014 remained well-balanced. In 2014, the Government ran a consolidated budget surplus of 1% of GDP (compared with 0.2% in 2013).

7 7 According to the preliminary data of the Ministry of Finance, in 2014, consolidated budget revenues grew by 15.9%, amounting to BYR219.3 trillion (28.2% of GDP compared with 29.2% of GDP in 2013) (Attachment 1.3). Consolidated budget expenses amounted to BYR211.1 trillion (27.1% of GDP versus 28.9% of GDP in 2013). In 2014, republican budget ran a surplus in the amount of BYR5.4 trillion, or 0.7% of GDP (in 2013 it ran a deficit of 0.4% of GDP), as well. Republican budget revenues grew in 2014 compared with 2013 by 21.2% and totaled BYR128.2 trillion (16.5% of GDP versus 16.6% of GDP in 2013). Republican budget expenses totaled BYR122.8 trillion (15.8% of GDP compared with 17% of GDP in 2013). As at January 1, 2015, the Government debt of the Republic of Belarus amounted to BYR197.5 trillion, growing by BYR43.4 trillion (or by 28.2%) compared with early As at January 1, 2015, the Government domestic debt totaled BYR48.4 trillion (5.7% of GDP), having grown by BYR12.7 trillion (or by 35.5%) since the beginning of the year. In 2014, domestic government bonds for legal and natural persons worth USD706.8 million and BYR2.4 trillion were placed. Since the beginning of 2014, domestic government bonds for legal and natural persons worth USD199.6 million and BYR0.3 trillion were retired. The Government external debt amounted as at January 1, 2015 to USD12.6 billion (16.6% of GDP), having grown over 2014 by USD0.1 billion, or by 1.1%, adjusted for the currency translation differences. In 2014, the Government attracted external loans in the amount of USD5.2 billion; repaid USD4.6 billion. According to the National Statistical Committee s data, the consumer prices grew in 2014 by 16.2% (December-on-December), in 2013 by 16.5% (Attachment 1.4). Consumer prices and tariffs grew to the utmost in the sphere of services (by 27.5%) (in 2013, by 39.1%) compared with the growth of prices for food products and non-foods (by 18.5% and 8.1% respectively) (in 2013, by 13.4% and 7.6% respectively). Consumer prices grew due to the increase in the prices for meat and meat foods (by 3.7 percentage points), alcoholic drinks (by 1.7 percentage points), as well as in the tariffs for housing and utility services (by 1.4 percentage points). Consumer prices and tariffs for this goods and services grew over 2014 by 6.8 percentage points, or 42% of the total growth of consumer prices and tariffs. The core inflation grew from 12% in 2013 to 14.6% in 2014 and, according to the National Bank s estimates, led to the increase in the consumer prices by 10.1% (the share of this indicator totaled 62.3% against 47.8% in 2013). Regulated prices and tariffs, including the prices for fruit and vegetable products, grew over 2014 by

8 8 22.1%, contributing to a 6.1% growth in consumer prices (their share was 37.7% compared with 52.2% in 2013). The dynamics of core inflation was influenced by the indirect price regulation measures as well as the monetary factors. The following indirect measures may be defined: - an increase in the tariffs for excisable goods (alcoholic and tobacco products); - a continuation of the policy of liquidation of the current system of crosssubsidization and further reduction of the list of goods and services, the prices (tariffs) for which are regulated by the state; and - the shock outbursts of prices for separate food products, primarily, meat and meat foods. At the same time, the inflationary processes were significantly influenced by the dynamics of the Belarusian ruble exchange rate versus foreign currencies (primarily, the US dollar and the euro), that was due to the negative impact of external factors, in particular, a downturn in business activity and depreciation processes in the countries which are main trade partners of the Republic of Belarus. Industrial producers prices rose by 13.5% compared with 10.7% in 2013, with prices for investment goods increasing by 7.6%, for intermediate goods by 13.8%, and for consumer goods by 15.1% The balance of payments and gross external debt In 2014, the balance of payments of the Republic of Belarus ran a considerable deficit despite the substantial improvement in the results of foreign trade in goods and services and reduction of the current account deficit. The deficit of the current account of the balance of payments totaled USD5.1 billion, or 6.7% of GDP, having dropped by USD2.5 billion compared with 2013 (Attachment 1.5). In 2014, the balance of foreign trade in goods and services improved to minus USD0.4 billion (in 2013, it totaled minus USD2.3 billion) due to the decreased domestic demand. In 2014, the balance of foreign trade in goods was characterized by the deficit in the amount of USD2.6 billion (in 2013, USD4.6 billion). At that, the balance of foreign trade in energy goods improved by USD0.5 billion, amounting to minus USD0.3 billion. The balance of foreign trade in intermediate non-energy goods totaled minus USD1.1 billion, compared with USD4 billion in The balance of foreign trade in investment goods remained at the level of 2013; in consumer goods worsened by USD2.1 billion, amounting to minus USD1.9 billion.

9 9 In 2014, exports of goods dropped by 2.2%, or by USD0.8 billion, amounting to USD35.7 billion. Reduction in the delivery of milk and meat foods, oil and oil products, tires, load carrier vehicles, and tractors and trucks made the major impact on the dynamics of exports. This decrease was partially compensated by the growing exports of potash fertilizers. Imports of goods dropped in 2014 by 6.8%, or by USD2.8 billion, amounting to USD 38.3 billion. Declining investments in fixed capital accounted for the decrease in the investment imports by USD0.9 billion. Consumer imports grew by USD1.5% billion, including due to the decline in prices (in dollar equivalent) for the consumer goods in the Russian Federation as a result of a considerable depreciation of the Russian ruble. The major items contributing to increase in the consumer goods imports were the imports of cars and fruits and vegetables. The imports of intermediate goods dropped by USD2.9 billion, including that of energy goods by USD0.7 billion. In 2014, the turnover of foreign trade in services grew by 5.3%, amounting to USD13.4 billion, with the exports of services growing by 4.2% and totaling USD7.8 billion. The imports of services grew by 7%, amounting to USD5.6 billion. The surplus of foreign trade in services totaled USD2.2 billion (less 2.4% compared with 2013) and partially compensated the deficit in the trade in goods. The balance of primary income grew in 2014 by USD0.3 billion and stood at minus USD2.4 billion, that was caused by the decrease in incomes designed for payments to direct investors. The balance of secondary income was negative in the amount of USD2.3 billion against a negative balance totaling minus USD2.5 billion in 2013, that was due to the transfer of customs duties for the exports of oil products in the amount of USD3 billion to the Russian Federation. According to the financial account, in 2014 net borrowing from other countries (excluding the credit of the Government of the Russian Federation worth USD2 billion) totaled USD2.3 billion. Attraction of financial resources to the Republic of Belarus at the expense of foreign direct investments amounted to USD1.8 billion. At the same time, the inflow of foreign direct investments (excluding reinvested incomes) was still insufficient USD0.9 billion compared with USD0.8 billion in Net borrowing by the banking system (excluding the change in the National Bank s reserve assets) worth USD0.9 billion and net attraction of borrowed funds by the non-financial institutions worth USD0.9 billion contributed to the positive value of net borrowing in The planned repayment of the previously attracted credits (worth USD1.4 billion) by the Government of the Republic of Belarus led to the decline in the value of net foreign borrowings in 2014.

10 10 In 2014, the balance of payments ran a deficit of USD3.4 billion and was financed by attraction of credit from the Government of the Russian Federation worth USD2 billion and reduction of the international reserve assets by USD1.4 billion. As at January 1, 2015, gross external debt of the Republic of Belarus amounted to USD40.1 billion, or 52.8% of GDP, increasing over 2014 by USD0.4 billion, or by 1.1% (Attachment 1.6). The National Bank s external debt grew over 2014 by USD0.9 billion, amounting as at January 1, 2015 to USD2.2 billion. Growing obligations to non-residents under long-term credits and loans were mainly responsible for the increase in the National Bank s external debt. External debt of other Belarusian organizations attracting deposits amounted as at January 1, 2015 to USD7.4 billion, having dropped over 2014 by 10.1%. Obligations to non-residents under credit resources in foreign exchange accounted for the major part of their external debt (88.9%). External debt of the other sectors (including intercompany financing) grew over 2014 by USD0.3 billion, amounting to USD17.4 billion, or 43.4% of the country s gross external debt. The principal debt of the non-banking sector (64.2%) is represented by the short-term obligations for the period of one year and less. The main instruments of attracting external financing were trade credits and advance payments in the amount of USD8.4 billion, or 48.6% of the non-banking sector s external debt. Over the recent years the Republic of Belarus accumulated significant volume of foreign debt, with the stable trend towards switching from the shortterm to the long-term borrowing being observed. As at January 1, 2015, longterm borrowings accounted for 63.7% of the total volume of borrowings Financial sector Banking sector Institutional characteristics As at January 1, 2015, the banking sector comprised 31 banks. The number of branches fell in 2014 from 94 to 65 owing to the streamlining by banks of their regional structures. At the same time, the total number of banks organizational units (branches, banking services centers, settlement and cash centers, and exchange offices) in the territory of the country grew over 2014 by 0.9%, amounting as at January 1, 2015 to 4,728. As at January 1, 2015, there were seven representative offices of foreign banks in the Republic of Belarus, including those of the Russian Federation,

11 11 Latvia, and Germany, as well as a representative office of the Interstate Bank. Foreign capital participated in the authorized capital of 26 banks. In 20 banks the share of foreign investors in the authorized capital exceeded 50% (of which six banks were wholly-foreign owned). As at January 1, 2015, the banks aggregate registered authorized capital amounted to BYR33.6 trillion, having increased in 2014 by 5.7%. Institutional development of banks in 2014 was characterized by: - the decreased share of banks controlled by the Government in the banking sector s aggregate authorized capital from 78.6% to 74.8%; - the increased share of foreign banks * in the aggregate authorized capital of banks from 19.6% to 21.3%. The share of such banks in the aggregate authorized capital grew from 35.2% to 36.8%. In the banking sector s assets the share of banks controlled by non-residents dropped from 35.2% to 33.6%. Capital from Russia, Iran, Cyprus, Switzerland, Austria, the Netherlands, Poland, Lebanon, Ukraine, Kazakhstan, Germany, Luxembourg, Georgia, Great Britain, United Arab Emirates, USA, and other countries participates in the authorized capital of Belarusian banks; and - the increased share of banks controlled by residents of private form of ownership in the authorized capital of the banking sector from 1.8% to 4%, with the share of these banks in the banks assets growing by 0.3 percentage points and amounting to 1.3% and in the aggregate regulatory capital from 1.8% to 3.2%. The share of the State Committee on Property in the authorized funds of nine banks amounted as at January 1, 2015 to BYR23.2 trillion (68.9% of the banking sector s aggregate authorized capital) Structure of banks assets and liabilities In 2014, banks assets grew by BYR86.4 trillion, or by 21.9%, amounting as at January 1, 2015 to BYR481.5 trillion. As at January 1, 2015, assets (liabilities)/gdp ratio totaled 61.9% (as at January 1, 2014, 60.9%). As at January 1, 2015, the share of banks claims on the economy in the banks assets amounted to 72% (as at January 1, 2014, 71.7%). The share of the long-term credits in the total debt under credits amounted as at January 1, 2015 to 73%, having decreased over 2014 by 1.3 percentage points. In 2014 as a whole, the dynamics of growth of the banks claims on the * Foreign banks are banks in which the share of foreign investors in the authorized capital exceeds 50%

12 12 economy was characterized by a downturn in the banks activity. Banks claims on the economy grew in 2014 by BYR63.5 trillion, or by 22.4%, with the parameter prescribed in the Guidelines for 2014 being 16-19% (in 2013 they grew by 28.5%). Following the slowing-down of the rates of lending in 2014 Q1-3, since November the growth in the banks claims on the economy was accelerating. The growing households demand for credits in the national currency made the major impact on the increase in the banks claims in Belarusian rubles on the economy. In 2014, banks claims on the economy in the national currency grew by BYR25.8 trillion (by 18.4%), amounting as at January 1, 2015 to BYR166.4 trillion. In the early 2014, the rates of banks lending to the economy in foreign exchange outstripped that in rubles, but later on they slowed-down to a considerable degree due to the National Bank s decisions aimed at constraining lending in foreign exchange. Banks claims on the economy in foreign exchange in dollar terms reduced due to the appreciation of the US dollar exchange rate versus the euro and the Russian ruble. As a result, as at January 1, 2015, banks claims on the economy in foreign exchange (in dollar terms) totaled USD15.2 billion, having grown over 2014 by 1.4% (by USD214.2 million) compared with 30.2% in Banks funds were mainly used for lending to legal and natural persons (Attachments ). As at January 1, 2015, banks claims on the economic entities amounted to BYR282.8 trillion, or 81.5% of the aggregate volume of the banks claims on the economy. The enterprises and organizations of the processing and trade industries, those involved in repair of vehicles, household appliances, and items of personal use, as well as of agricultural, hunting, and forestry industries were, mainly, responsible for the demand for credits. The structure of growth of banks claims on economic entities in foreign exchange changed over 2014 to a significant degree. Where in 2013 they went up, mainly, due to the increase in credits, in 2014 at the expense of growth in the letters of credit and other assets-related operations, transactions involving securities, and loans. In 2014 as a whole, banks claims on economic entities in foreign exchange grew by USD238 million (in 2013, by USD3,539 million), while in December 2014 they dropped by USD368 million. In 2014, banks claims on natural persons grew by BYR9.2 trillion, or by. Claims of banks and JSC Development Bank of the Republic of Belarus on the economy grew over 2014 by 23.1%.

13 %, amounting as at January 1, 2015 to BYR64.1 trillion. Households debt under credits for real estate financing grew over 2014 by BYR6.8 trillion, or by 17.3%, amounting as at January 1, 2015 to BYR45.9 trillion. The share of soft credits amounted to 86.6%, having grown over 2014 by 2 percentage points. Households debt under consumer credits grew over 2014 by BYR2.2 trillion (or by 14.7%), amounting as at January 1, 2015 to BYR17.1 trillion. The share of these credits in the total volume of households debt under credits totaled 27.1% as at January 1, 2015, compared with 27.6% as at January 1, As at January 1, 2015, credit amounts owed by one citizen of the Republic of Belarus averaged BYR6.6 million, or USD560.2 in equivalent, compared with BYR5.7 million, or USD599.4 in equivalent, as at January 1, Banks deposits were one of the key sources of lending to the economy in In 2014, funds attracted from natural persons (including bank deposits, non-residents funds, bank deposits in precious metals and stones, saving certificates and bonds) rose by BYR35 trillion, or by 32.1%, amounting as at January 1, 2015 to BYR144 trillion, with their share in banks liabilities growing from 27.6% to 29.9%. Banks deposits were the most popular banking products with households for placement of temporary free funds. They grew over the year under review by BYR32 trillion, or by 31.3%, amounting as at January 1, 2015 to BYR134.3 trillion, or 93.3% of the total volume of attracted natural persons funds. Bank deposits in the national currency grew over 2014 by BYR6.6 trillion, or by 20%, amounting as at January 1, 2015 to BYR39.6 trillion, of which bank time deposits went up by BYR4.4 trillion, or by 19.1%, amounting to BYR27.2 trillion. Natural persons deposits in foreign exchange (in ruble terms) grew over 2014 by BYR25.4 trillion, or by 36.6%, amounting as at January 1, 2015 to BYR94.7 trillion. Time deposits * grew by BYR23.9 trillion, or by 36.7%, amounting to BYR89.1 trillion. Natural persons deposits in foreign exchange (in dollar terms) grew over 2014 by USD0.7 billion, or by 9.7%, amounting as at January 1, 2015 to USD8 billion. Time deposits * grew by USD0.7 billion, or by 9.7%, amounting as at January 1, 2015 to USD7.5 billion. The share of bank deposits in foreign exchange in the aggregate volume of households deposits grew over 2014 from 67.7% to 70.5%, with the share of bank deposits in Belarusian rubles going down from 32.3% to 29.5%. Time deposits and deposits in escrow.

14 14 The bulk of bank deposits is placed with JSC JSSB Belarusbank, the share of which in the natural persons deposit market totaled 47.6% as at January 1, As at January 1, 2015, the savings deposited with banks averaged BYR15.2 million per citizen of the Republic of Belarus, compared with BYR11.5 million as at January 1, This indicator grew in dollar terms from USD1,209.9 to USD1,281.3, or by 6% Effectiveness and sustainability of the banking sector With a view to preventing the development of the negative trends in the financial market and improving the qualitative parameters of the banks activity, which make it possible to withstand the domestic and external destabilizing impact, the National Bank implemented a number of countercyclical measures, including the annulment of the tightened requirements to the covering of risk by capital and special provisions, which had been implemented in The additional profit and capital, which were realized due to the measures taken, made it possible for banks to maintain the key secure functioning requirements at the adequate level and cover the heightened risks being in place. As at January 1, 2015, banks regulatory capital totaled BYR62.2 trillion, having increased over 2014 by 16.1% in nominal terms. In 2014, the main sources of the regulatory capital growth in the banking sector as a whole were: increase in the registered authorized capital, subordinated credit (loan), growth in profit and funds established at the expense of banks profit, and revaluation of fixed assets. As at January 1, 2015, the regulatory capital/gdp ratio was 8%. The banks profit amounted in the year under review to BYR7.6 trillion, a 11.3% increase compared with The key factor of profit growth was an increase in the volume of operations involving assets. In 2014, the banking sector s income had the following structure: change in the reserve 62.8%, interest income 26%, commission income 5.6%, other banking income 4.7%, and other operational income 0.9%. In the structure of expenditures the allocations to reserves totaled 67.6%, interest expenditures 18.6%, other operational expenditures 8.8%, other banking expenditures 3.5%, and commission expenses 1.5%. At the end of 2014, the banking sector s return on assets was 1.7% (1.9% in 2013) and return on regulatory capital 13.1% (in 2013, 13.8%). As at January 1, 2015, the values of the following banks secure functioning indicators may be characterized as satisfactory:

15 15 - adequacy of banks regulatory capital (the ratio of the regulatory capital and risks assumed by banks) 17.4% (the prescribed minimum prudential requirement for an individual bank being 10%); - ratio of liquid assets to total assets 27.2% (the prescribed requirement being at least 20%); - short-term liquidity (the ratio of actual liquidity to required liquidity) 1.9% (the requirement being at least 1); - instant liquidity (the ratio of assets on demand to liabilities on demand) 251.7% (the requirement being at least 20%); and - current liquidity (the ratio of current assets to current liabilities) 133.7% (the requirement being at least 70%). The National Bank exercised systemic monitoring of and control over the quality of banks assets by means of analyzing reports obtained from banks and carrying out on-site examinations. Comprehensive inspections focused on banks activities aimed at assuring their secure and liquid functioning and maintenance of an adequate level of bank risks, primarily, of a credit risk. Assets exposed to credit risk grew over 2014 by 19.8% and as at January 1, 2015 totaled BYR330.6 trillion. As at January 1, 2015, bad assets (assets classified under risk Groups III, IV, and V) totaled BYR14.5 trillion, increasing by 17.8% over Assets classified under Group III amounted to BYR11.4 trillion (78.6% of the total volume of bad assets), assets classified under Group IV BYR2.3 trillion (15.9%), and assets classified under Group V BYR0.8 trillion (5.5%). The share of the banks bad assets in the assets exposed to credit risk remained at the acceptable level (as at January 1, %; as at January 1, %). The legal persons accounts payable prevailed in the bad assets. As of January 1, 2015, a special provision to cover potential losses under assets exposed to credit risk was formed to the extent required. Thus, the banking sector s stability as at year-end 2014 was characterized as adequate Financial market Foreign exchange market In 2014, domestic foreign exchange market turnover totaled USD68.6 billion, exceeding by 23.6% the level of The stock market turnover amounted to USD30.1 billion, having dropped over 2014 by 5.4%. Cash market turnover stood at USD17.5 billion, having increased over 2014 by 3.1%. In the year under review, resident economic entities: - sold foreign exchange in the amount of USD22.1 billion, a drop by

16 16 3.7% (by USD0.8 billion) compared with 2013; and - purchased foreign exchange in the amount of USD22.6 billion, an increase by 0.2% (by USD0.1 billion) compared with 2013 (Attachment 1.11). In 2014, foreign exchange purchased by resident economic entities in the domestic foreign exchange market was, mainly, used to repay credits (USD8.7 billion or 38.5% of the total volume purchased over 2014), pay for fuel and energy resources (USD3.3 billion or 14.6%) procure raw products and materials (USD3 billion or 13.3%), and purchase equipment and components (USD2.4 billion or 10.7%). A total of 77.3% of the foreign exchange purchased by resident economic entities was used for the above-mentioned purposes. As a result, net demand for foreign exchange by resident economic entities in 2014 stood at USD0.5 billion (in 2013, net supply of foreign exchange totaled USD0.4 billion). At that, in January - October 2014 the enterprises sold USD133.9 million on net basis, while in November 2014 net purchase totaled USD178.9 million, in December 2014 USD450 million. In January - October 2014, the situation with regard to the foreign exchange purchase by households was relatively stable. In the period under review, the natural persons net demand for foreign exchange amounted to USD158.6 million. However, net purchase of foreign exchange by households grew to a significant degree in November 2014, amounting to USD324.8 million, in December it totaled USD901.6 million. Households purchased over 2014 USD1.4 billion on a net basis (in 2013, USD2.4 billion), with a net supply under operations involving foreign exchange in cash totaling USD0.2 billion and a net demand under operations involving non-cash foreign exchange amounting to USD1.6 billion (Attachment 1.12). The operations involving the US dollars dominated the Belarusian foreign exchange market (62.4%). The share of this currency in foreign exchange operations fell by 6.4 percentage points compared with 2013, with the share of euro increasing from 17.8% to 20.5%. The share of the Russian ruble in the foreign exchange operations grew by 3.9 percentage points and totaled 16.7%. The volume of operations involving other currencies remained insignificant (less than 1%) Interbank credit market In 2014, interbank credits in the national currency continued to be one of the main instruments regulating banks liquidity. 31 resident banks of the Republic of Belarus and non-resident banks were involved in the activities in this segment of the money market. In the year under review the interbank credit market was characterized by significant liquidity fluctuations. The volume of operations carried out by banks in the interbank market totaled BYR128 trillion (in 2013, BYR102 trillion). The

17 17 structure of time instruments in the interbank market didn t undergo significant changes compared with 2013 intraday interbank credits accounted in 2014 for 89.9% (85.6% in 2013). At the same time, the banks continued in 2014 to attract/place resources in the national currency in the interbank market through repo transactions. The share of such operations increased, averaging 46.1% of the balance of amounts owed against 15.5% in 2013, that was, mainly, caused by the active use of repo transactions by the state-owned banks in the interbank market. The interest rates in the intraday ruble interbank market were within the interest rate band formed by the standing facilities designed to regulate banks liquidity (Attachment 1.13) Deposit and credit markets interest rates Change in the refinance rate and interest rates on liquidity regulation instruments, as well as the situation with liquidity in the banking sector, determined the dynamics of interest rates in the deposit and credit markets (Attachment 1.14). With a view to stimulating the lowering of the interest rates by banks under credits to legal persons and ensuring the accessibility of credit resources in the national currency for the real sector of the economy, the Board of the National Bank of the Republic of Belarus took Resolution No. 260 dated April 22, 2014 On the Maximum Amount of Interest Rates on Banks Transactions Involving Provision of Monetary Funds (Credits) to Resident Legal Persons of the Republic of Belarus (National Legal Internet Portal of the Republic of Belarus, May 7, 2014, 8/28636) (is valid till January 1, 2015), which establishes a maximum amount of the interest rates on credits provided to the resident legal persons of the Republic of Belarus in Belarusian rubles. Due to the interest rate measures, which had been taken, the interest rates in the credit and deposit market went down in January - November In November 2014, the average interest rate on fresh bank credits * in freely convertible currency totaled 30.2% per annum, decreasing by 11.7 percentage point compared with December The average interest rate on fresh time deposits in Belarusian rubles amounted in November 2014 to 20.8% per annum, dropping by 15.9 percentage points versus December At the same time, due to the adverse processes in the country s financial market and the interest rate policy measures taken by the National Bank in December 2014, the interest rates in the economy went up. * Excluding soft credits granted pursuant to decisions of the President and the Government of the Republic of Belarus.

18 18 The interest rate on fresh bank credits * in the national currency averaged 31% per annum in December The interest rate on fresh bank deposits in Belarusian rubles averaged 33.4% per annum in the same month. At the same time, the interest rates on credits and deposits in foreign exchange did not undergo any significant changes over The average interest rate on fresh bank credits * in freely convertible currency increased over 2014 by 0.5 percentage points, totaling 9.6% per annum in December. The average interest rate on fresh time deposits in freely convertible currency went down from 5.4% per annum in December 2013 to 4.9% per annum in December Government securities market In 2014, the Ministry of Finance placed government short-term bonds (GKOs) and government long-term bonds (GDOs) with interest yield denominated in Belarusian rubles in the total amount of BYR2.4 trillion, at face value, for legal persons. In the year under review, the Ministry of Finance retired GDOs worth BYR0.3 trillion. In the year under review, the volume of GKOs and GDOs denominated in Belarusian rubles in circulation grew by BYR2.1 trillion (by 14.6%) and as of January 1, 2015 totaled BYR16.8 trillion at face value. In 2014, the Ministry of Finance placed interest-bearing government bonds denominated in foreign exchange in the domestic government bonds market in the total amount of USD551,9 million and EUR90.2 million at face value. In the year under review, the Ministry of Finance allocated USD150 million to repay the government bonds of this kind placed in the domestic market. Thus, the volume of interest-bearing government bonds denominated in foreign exchange and placed in circulation in the domestic market increased: - by USD401.9 million (by 22.7%), amounting as at January 1, 2015 to USD2,170.5 million at face value, or BYR25.8 trillion in equivalent; and - by EUR90.2 million (by 32.8%), amounting as at January 1, 2015 to EUR365.2 million at face value, or BYR5.3 trillion in equivalent. The total amount of interest-bearing government bonds denominated in foreign exchange and placed in circulation in the domestic market grew by BYR10.6 trillion, amounting to BYR31 trillion in equivalent. In 2014, banks claims on the Government of the Republic of Belarus in securities denominated: * Excluding soft credits granted pursuant to decisions of the President and the Government of the Republic of Belarus.

19 19 - in Belarusian rubles reduced by BYR2 trillion (by 37%) at book value, totaling BYR3.4 trillion as of January 1, 2015; and - in foreign exchange grew by BYR9.3 trillion (by 69.6%) at book value, totaling BYR22.8 trillion in equivalent as of January 1, As at January 1, 2015, 28 banks and 37 non-bank professional participants of the securities market were authorized to take part in government securities trading through electronic trading system of the Joint-Stock Company Belarusian Currency and Stock Exchange (hereinafter JSC Belarusian Currency and Stock Exchange ). Due to the increase in the volume of government securities denominated in Belarusian rubles in circulation, the secondary market witnessed in 2014 an increase in the share of transactions involving such securities. Thus, the total volume of government securities denominated in Belarusian rubles traded on the floor of JSC Belarusian Currency and Stock Exchange amounted in 2014 to BYR27.3 trillion, increasing by BYR11.7 trillion or by 74.7% compared with ,905 transactions were concluded on the exchange s floor in 2014 (in 2013, 1,256 transactions). The weighted average yield on the transactions involving until redeemed GKOs and GDOs amounted to 7.6% per annum. The weighted average repo rate (irrespective of the term) on the transactions involving GKOs and GDOs stood in 2014 at 26% per annum. In the year under review, the following transactions involving interestbearing government bonds denominated in foreign exchange and placed in the domestic market were carried out in the secondary market: - on the floor of the JSC Belarusian Currency and Stock Exchange 56 transactions worth BYR4.5 trillion (in equivalent), with the average weighted yield under until redeemed transactions totaling 11% per annum; under repo transactions 6.9% per annum; and - in the over-the-counter market (hereinafter the OTC market ) 10 transactions worth BYR0.25 trillion (in equivalent) Corporate securities market Further growth of the share of the securities debt market due to the increased volumes of corporate bonds issue was the main trend in 2014 (Attachment 1.15). Thus, the volume of bonds issued in 2013 stood at 53.2% of the total volume of shares and bonds issue, having grown in 2014 to 62.7%. At the same time, the volume of government bond issue dropped from 27.4% to 9.3%. The share of the equity issue totaled 37.3% (in 2013, 46.8%). In 2014, the volume of registered issue of joint-stock companies shares totaled BYR38.9 trillion, dropping by 20% compared with 2013

20 20 (BYR48.6 trillion). As at January 1, 2015, the operating issuers shares in circulation amounted to BYR225 trillion, increasing by 20.8% compared with January 1, 2014 (BYR186.2 trillion), with the ratio of the volume of shares in circulation to GDP remaining unchanged and totaling as at January 1, 2015 to 28.9% (as at January 1, 2014, 28.7%). The annual issue of corporate bonds amounted to BYR52.9 trillion, growing more than twice compared with 2013 (BYR25.1 trillion). In the reporting period, 456 issues of corporate bonds of 211 issuers were registered. Banks and enterprises were actively involved in issuing bonds. The volume of bonds issued by banks totaled BYR34 trillion, or 64.4% of the total volume of issued corporate bonds (in 2013, BYR14.5 trillion). The share of corporate bonds issued in the national currency grew in 2014 to 51.2% of the total issue (in 2013, 49.7%). Thus, as at the beginning of 2015, 737 issues of corporate bonds of 302 issuers worth BYR98.8 trillion, or 12.7% of GDP, were in circulation (as at January 1, 2014, BYR64.6 trillion, or 10% of GDP). As a result, the volume of corporate bonds in circulation grew over the year by BYR34.2 trillion, or by 52.9%. The volume of corporate bonds issued in the national currency amounted as at January 1, 2015 to 64.3% of the total volume of corporate bonds in circulation (as at January 1, 2014, 74.3%). Active growth of corporate bonds issue in 2014 was, probably, caused by the expiry of preferential tax treatment of incomes from operations involving bonds issued from April 1, 2008 to January 1, In the year under review, 64 issues of bonds of local executive and administrative authorities worth BYR2.8 trillion were registered. The total volume of issue was denominated in the national currency (in 2013, 46.9% of bonds of local executive and administrative authorities was issued in foreign exchange). As at January 1, 2015, the volume of the above-mentioned bonds in circulation amounted to BYR11.1 trillion, growing by 31.8% compared with January 1, 2014 (BYR8.4 trillion). The share of bonds of local executive and administrative authorities denominated in the national currency amounted as at January 1, 2015 to 85% of the total volume of bonds of local executive and administrative authorities in circulation (as at January 1, 2014, 84.2%). The ratio of the volume of this market to GDP was 1.4%. In 2014, initial public offering of corporate shares and bonds worth BYR3.2 trillion was carried out on the floor of the JSC Belarusian Currency and Stock Exchange, a considerable decline compared with 2013 (BYR5 trillion). In 2014, banks bonds worth BYR1.9 trillion (a 30% decline on 2013) and other legal persons bonds worth BYR1.4 trillion (a 39.4% decline on 2013) were placed, with the volume of placed exchange-traded bonds

21 21 amounting to BYR2.2 trillion (BYR3.9 trillion in 2013). In 2014, the volume of open joint-stock companies shares placed in the primary market totaled BYR424.9 million (in 2013, BYR53 billion; in 2012, BYR738.9 billion). The weighted average yield in the primary market was: - on banks bonds 26.9% per annum; and - on other legal persons bonds 33.8% per annum. In 2014, the total volume of the secondary stock trading totaled BYR25.3 trillion, increasing by BYR6.8 trillion compared with 2013 (BYR18.5 trillion), including in: - shares BYR0.5 trillion (in 2013, BYR0.5 trillion); - corporate bonds BYR24.7 trillion, including banks bonds BYR16.2 trillion (in 2013, BYR17.3 trillion and BYR15.7 trillion respectively); and - bonds of local executive and regulatory authorities BYR0.1 trillion (in 2013, BYR0.7 trillion). The volume of secondary trading increased at the expense of the growing volumes of transactions involving corporate bonds. The weighted average yield in the secondary market stood at: - on banks bonds 20.3% per annum; and - on other legal persons bonds 10.8% per annum. Since 2008, the market prices of shares have been calculated based on the results of stock trading, that makes it possible to calculate capitalization of these securities. Thus, as at January 1, 2012, the shares market capitalization totaled BYR9.5 trillion (3.2% of GDP), as at January 1, 2013 BYR3.8 trillion (0.7% of GDP), as at January 1, 2014 BYR35.1 trillion (5.4% of GDP), and as at January 1, 2015 BYR6.8 trillion (0.9% of GDP). A sharp decline of the level of capitalization as at January 1, 2015 was due to the decreased number of shares in circulation for which the market price was calculated. In 2014, transactions worth BYR50.8 trillion (in 2013, BYR28.9 trillion), including purchase/sale transactions involving securities worth BYR48.6 trillion (in 2013, BYR24.1 trillion), of which transactions involving bonds in the amount of BYR45.8 trillion, were entered into in the OTC securities market Bank management funds With a view to expanding the range of investment and banking services being rendered and introducing the collective investment institutions into the banks activities, the National Bank proposed a new financial instrument designed to attract and place banks resources bank management funds. Resolution of the Board of the National Bank No. 178 dated March 26, 2014 On Approval of the Instructions on the Regulation of Relations Arising as a

22 22 Result of Pooling Monetary Funds and/or Securities in the Bank Management Fund on the Basis of Agreement on Trust Management of the Bank Management Fund (National Legal Internet Portal of the Republic of Belarus, March 12, 2014, 8/28544) was approved for the purpose of regulation of relations arising due to establishing bank management funds. Bank management fund is one of the trust management forms, where a bank as a trust manager unifies monetary funds and/or natural and legal persons securities as a shared ownership for the purpose of investing in different financial assets permitted by legislation to obtain income. The first bank management funds started their operation in June The Board of the National bank took a decision to register the rights of three bank management funds of Priorbank JSC as a trust manager. As at January 1, 2015, the funds net assets totaled USD1,849.6 thousand and EUR970.3 thousand (as at July 1, 2014, USD300 thousand and EUR52 thousand). Implementation of the bank management funds in the Republic of Belarus will make it possible to intensify development of the country s financial market, expand the banks possibilities in attraction and placement of monetary funds, as well as ensure the availability of the alternative to the traditional financial market instruments for the natural persons and economic entities. Establishment of the collective investment institutions is especially important for the development of the corporate securities market. Additional financing of enterprises by means of issuing shares and bonds thereby is eased to a considerable degree in case of availability of large collective investors.

23 23 Chapter 2 National Bank s activities In 2014, monetary policy was aimed at preventing acceleration in inflationary processes and creating conditions for a balanced development of the Belarusian economy. In 2014, all monetary policy instruments of the National Bank were used to attain these objectives Monetary policy Exchange rate policy The exchange rate policy pursued by the National Bank in 2014 was mainly aimed at curbing inflation, reducing devaluation expectations, and preserving stability in the foreign currency market. A significant depreciation of the Russian ruble against world currencies (at year-end 2014 in particular) led to the strengthening of the Belarusian ruble against the currency of the Russian Federation - Belarus major trading partner and triggered a rapid rise in devaluation expectations and demand for foreign currency in December 2014 which was conducive, in its turn, to the depreciation of the national currency. In 2014, the Belarusian ruble depreciated by 24.6% against the US dollar (to BYR11,850/USD1) and by 9.9% against the euro (to BYR14,380/EUR1) and appreciated by 26.2% against the Russian ruble (to BYR214.5/RUR1). The exchange rate of the Belarusian ruble dropped by 0.4% against the currency basket, with the cost of the currency basket amounting to BYR2,523.6 at the beginning of A significant growth in devaluation expectations and an increase in demand for foreign currency, which were registered in November - December 2014, affected the dynamics of the exchange rate to the utmost. In December 2014, the Belarusian ruble depreciated by 9.7% against the US dollar and by 6.4% against the euro and appreciated by 5.5% against the Russian ruble. The cost of the currency basket was calculated as geometric mean of bilateral exchange rates of the Belarusian ruble against the US dollar, the euro, and the Russian ruble on a given date. Beginning on January 9, 2015, the share of the Russian ruble in the currency basket increased to 0.4 and the share of the US dollar and the euro fell to 0.3. In this connection, beginning in 2015 the cost of the currency basket is calculated according to the new formula as weighted geometric mean of bilateral exchange rates of the Belarusian ruble against the US dollar, the euro, and the Russian ruble with the shares of the US dollar, the euro, and the Russian ruble accounting for 0.3, 0.3, and 0.4 respectively.