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Ulyukayev Dismisses Monetary Easing to Reverse Russian Slowdown

Russia’s central bank is holding back from easing monetary policy to counter a deepening economic slowdown as weak institutions remain a major drag on growth, according to First Deputy Chairman Alexey Ulyukayev.

“The situation from the economic point of view has more or less stabilized,” Ulyukayev said at a conference organized by VTB Capital in London today. “What for do we have to soften monetary policy? To support demand for what -- demand for imported goods?”

The comments signal that months of government calls for lower interest rates haven’t dented the central bank’s resistance to easing policy even as Russia’s $2 trillion economy grows at the weakest pace since a 2009 contraction. Ulyukayev said gross domestic product will probably expand 2.5 percent to 3 percent this year, with monetary stimulus powerless to raise growth above 5 percent, the medium-term target set by Prime Minister Dmitry Medvedev.

Russia kept its main interest rates unchanged in May for an eighth month after becoming the biggest emerging economy to raise borrowing costs in 2012 with an increase in September. The government last week submitted a draft plan to revive the economy to President Vladimir Putin, with measures including lowering bank lending rates and slowing increases in utilities tariffs.

“The only reason for the monetary agencies to soften policy is to close the relative gap between actual growth and potential growth,” Ulyukayev said. “If you have 80 percent use of industrial capacity and 5.3 percent of unemployment, it means you have no room.”

Easing Sidestepped

Bank Rossii is declining to join a wave of interest-rate cuts from India to Poland as Chairman Sergey Ignatiev prepares to step down at the end of his third and final term on June 24. He will be replaced by Putin’s aide Elvira Nabiullina, a former economy minister who is helping prepare the stimulus plan.

While central banks can “easily” support growth in the short term, “the cycle of historically lowest rates is closing,” Ulyukayev said.

“First the Fed and then other authorities will change policy,” he said. “The ECB is just buying time for the governments and business society of the European Union to make serious, radical, and long-term structural and institutional decisions.”

‘Largely Justified’

While some government members, including Economy Minister Andrei Belousov, have criticized Russia’s restrictive monetary policy, arguing that the economy may slide into a recession later this year without stimulus, Putin called the regulator’s stance “largely justified” last month.

Ulyukayev is among candidates to replace Nabiullina as Putin’s chief economic aide, the Vedomosti newspaper reported April 15.

The Economy Ministry has proposed making Bank Rossii, which is shifting its policy regime to target inflation by 2015, responsible for economic growth together with the government. Putin, the government and the central bank agreed not to widen the monetary authority’s mandate, Medvedev told reporters May 18 in Sochi.

Speaking today, Ulyukayev said a “general understanding is that there should be some division of power and responsibilities between the government and the central bank.”

Russia’s economy grew 1.6 percent in the first three months from a year earlier, decelerating for a fifth consecutive quarter as corporate investment cooled. The central bank can’t battle stalled spending with lower rates and wants to use its policies -- including a shift to inflation targeting -- to build investor confidence, according to Ulyukayev.

“We are trying to reassure society, the banks, in the sustainability of policy,” he said. “Why investors do not invest? It’s a problem of confidence -- general confidence, confidence in the economic policy, monetary policy, structural policy.”

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