Nabiullina Sees ‘Limits’ in Using Debt Financing to Fund Growth

Russian central bank Governor Elvira Nabiullina raised questions about the use of debt financing to fund economic growth, underscoring the need to harness long-term capital as investment slumps.

“We need to think about some other ways to finance growth, because financing economic growth with debt, in my opinion, has its limits,” Nabiullina said at a conference in Moscow on Thursday. “There won’t be long-term investment growth in Russia” without such sources of financing as pension savings and life insurance, she said.

Policy makers faced down criticism from business leaders including billionaire Oleg Deripaska after they raised interest rates to punishing levels with six increases last year to stem the ruble’s worst crisis since 1998. Record outflows and a 14-month slump in investment are battering an economy on the verge of its first recession in six years, with sanctions over Ukraine limiting access to foreign markets for borrowers.

“An excessive debt burden may be not only a catalyst for development and investment but also a hindrance,” Nabiullina said. Regardless of the high level of interest rates, the ratio of debt to Ebitda “is already a considerable burden for companies, entire industries,” she said. Banking loans account for 57.6 percent of the Russian economy, according to Nabiullina.

Ebitda is an acronym for earnings before interest, taxes, depreciation and amortization.

‘Critical Importance’

“Mandatory pension savings are of critical importance for sources of long-term financing and Russia’s capital markets,” the governor said.

The government is divided over the fate of pension-fund contributions that are mainly invested in Russia’s government and corporate-debt market. The cabinet is weighing whether to divert savings from future retirement plans to meet obligations for current retirees or to restore the flow of cash to private and state pension funds that was in place before a freeze was imposed last year.

The government will make decision on pension savings soon, First Deputy Prime Minister Igor Shuvalov told reporters on Thursday. Shuvalov said he supports Nabiullina’s position on pension savings.

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