Seigniorage: who pays for the issue of money and how it reaches OFZ yields

Seigniorage is the income an issuer earns from the very act of creating money: the difference between the purchasing power of the monetary liabilities it issues and the cost of issuing them. A mint collected it as the gap between the face value of a coin and the cost of the metal plus the striking. A central bank collects it differently: it creates liabilities on which it pays almost nothing (cash in circulation is interest-free debt owed to the holder) and uses them to buy assets that earn interest or generate revaluation gains. That interest is modern seigniorage. In the end it goes not to shareholders but to the budget: the profit of the Bank of Russia is by law transferred to the federal budget (Article 26 of the law on the Central Bank, adopted in 2002), and the share to be transferred has been changed by separate laws — its exact current value is not in the platform's database, and there is no point in inventing it here: it is checked against the text of the law.

The mechanism: how the issuer's balance sheet turns into income

The place to look is the central bank's balance sheet. On the liabilities side are cash in circulation, banks' balances on correspondent accounts and budget funds. On the assets side are gold, foreign-currency reserves, claims on credit institutions and government securities. Seigniorage arises because the two sides of the balance sheet cost the issuer different amounts: cash is free for it and cannot be redeemed on presentation for anything other than more cash, whereas the assets earn a return.

A non-obvious point follows from this: the size of seigniorage depends not on a "printing press being switched on" but on how much money society is voluntarily willing to hold in interest-free form, and on the yield on the assets. The broader the demand for cash and the higher the rates on the asset side, the larger the flow. The more actively households move out of cash into deposits, cards and money market funds, the thinner this base becomes — the structure of the market for such instruments can be seen in the funds section.

Seigniorage and the inflation tax are not the same thing

This is the distinction people trip over most often. Seigniorage is the issuer's income. The inflation tax is a redistribution in the issuer's favour through the debasement of money already issued, at the expense of those who hold it. The two coincide in only one regime: when money issuance outpaces the growth of real demand for money.

If the monetary base grows in step with the economy and with demand for means of payment, the issuer earns income while the purchasing power of the rouble in people's hands is not eroded — the holder pays nothing. If issuance runs ahead of demand, the income is extracted directly from the pocket of the holder of rouble balances, and the base of this "tax" is exactly that part of savings that sits in money rather than in indexed or interest-bearing assets. Hence the classic conclusion: the inflation tax hits hardest those who have no access to interest-bearing instruments, and hits less those who sit in floating-rate paper or in short-dated debt. Fresh data on inflation and rate decisions are best followed in the news feed, not derived from theory.

Why the Russian case cannot be calculated "by the textbook"

The textbook formula for seigniorage assumes that the issuer's liabilities bear no interest. In reality this is true only of cash. The rest of the central bank's liabilities are remunerated: under a structural liquidity surplus, banks place their excess funds on deposit with the central bank at an interest rate tied to the key rate. These payments are a direct deduction from seigniorage. The higher the rate and the larger the excess liquidity in the system, the greater the share of its interest income the issuer hands back to the banks, and the less is left for the budget. In some years the Bank of Russia has reported an outright loss — in other words, seigniorage as an accounting result can be negative even while money issuance continues.

The second Russian nuance is the composition of assets. For a long time a considerable part of the reserves was held in foreign currency, and its return including revaluation depended on external rates and the exchange rate, not on domestic policy. After part of the reserves was frozen, the structure changed, and the link between "issuance and budget revenue" became even less direct.

Where this leads for a portfolio

Seigniorage is not a tradable quantity, but it sits at the intersection of channels that are traded.

The budget channel. Transfers of the issuer's profit to the budget are part of non-oil-and-gas revenues. The smaller they are, the greater the need for debt placements, and that puts pressure on the curve — it is visible in OFZ and in the bond market as a whole, especially at the long end.

The rate channel. A high key rate simultaneously makes the central bank's liabilities more expensive to service and raises the coupons on the floaters held by banks and funds. The same parameter that eats into seigniorage feeds the holder of a floating-coupon security.

The inflation channel. For an investor, talk of "printing money" matters not in itself but as a signal about future inflation and about which issuers will be able to pass costs through to prices. This pass-through can be read from companies' financial statements and margins — see financial reports and the security profiles in the stocks section. Companies with long-dated rouble liabilities and the ability to index their revenue gain from debasement; companies with foreign-currency costs and a regulated tariff lose.

Common mix-ups

Seigniorage is not equal to the budget deficit and does not cover it automatically: it is a separate flow, limited by the demand for money.

Seigniorage is not the same thing as money creation by banks. A commercial bank creates a deposit when it grants a loan, but it pays interest on that deposit and bears risk, so its gain is the interest margin, not seigniorage.

The shift from cash to cashless payments and the arrival of the digital rouble change the structure of the issuer's liabilities and therefore the base of seigniorage: interest-free cash is replaced by liabilities with different properties. What exactly the final design of remuneration on the digital rouble will be is a question of regulation, not of theory.

Definitions of related concepts — the monetary base, the key rate, the structural liquidity surplus — are collected in the platform's glossary.