How Elvira Nabiullina Can Improve Russia’s Central Bank
Russia, however, is different. Elvira Nabiullina will be in a position that many central-bank chiefs can only envy because she will have ample room to boost lending and growth, using conventional tools. The central bank’s crucial lending rate is 8.25 percent, compared with the near-zero rates in the U.K., the U.S. and the euro area.
A second difference is that Nabiullina will take over the Central Bank of Russia in June at a moment when Russia’s economy is at a pivotal point. The bank’s new leader needs a much wider focus to head off serious risks. As well as keeping interest rates down, she needs policies that will keep Basel III rules out and investments in.
Many observers of the Russian economy have been arguing that the central bank has kept monetary policy too tight for too long. The outgoing chairman, Sergey Ignatiev, repeatedly pointed to high inflation risks and unemployment as low as 5 percent as the two main obstacles to any easing. Those hurdles are diminishing.
Inflation slowed in March, unemployment is up to 5.7 percent and leading indicators of future growth rates -- such as retail sales, industrial production and economic confidence -- point to a decline. Nabiullina’s successor as economy minister, Andrei Belousov, gave a stark warning this month that Russia faces a possible recession this year.
I believe the central bank will need to cut interest rates by 0.75 percentage point in response. With inflation and economic growth both slowing, the question is when, not if, this will happen.
But a more accommodative monetary policy has limits. In the U.S., for example, securing sustainable economic growth has proved difficult, despite all of the Federal Reserve’s efforts. So Nabiullina should use other tools at her disposal.
A good start would be to redefine the central bank’s refinancing strategy. This can’t mimic the European Central Bank’s open-market operations because Russia’s tiny national bond market increases the risk of collateral shortage in the banking system. In 2012, collateral utilization -- the proportion of total collateral in the market that is being used for central-bank refinancing operations -- was about 50 percent in Russia, compared with about 20 percent across the euro area. A potential collateral drought is a long-term challenge in Europe. In Russia, it is already putting pressure on the money markets.
Russia’s central bank should borrow a different tool from the ECB’s kit, providing liquidity to banks through long-term refinancing operations. Combined with a rate cut, this would help to boost domestic lending and reduce the exposure of Russian companies to foreign-currency refinancing risks. High domestic interest rates make businesses seek financing abroad. As of January, Russian corporations had $564 billion of foreign debt, or about 30 percent of gross domestic product. That’s almost a third more than in January 2008.
Nabiullina will also have to make decisions on the introduction of the Basel III banking-regulatory regime and on improving Russia’s financial-market infrastructure. The central bank shouldn’t be in a hurry to introduce Basel III, at least this year, for two main reasons.
First, Basel III focuses on increasing the size and quality of capital reserves, both of which are crucial to the effective and safe operation of the financial system. Yet given the limited availability of funding sources in Russia today, this could also lead to a reduction in lending to the real economy. Some banks may struggle to raise the extra capital needed at a time when market conditions are tough.
Second, Basel III should be evenly adopted across all jurisdictions to avoid the risk of regulatory imbalances. Given that programs to introduce the new Basel III rules have stalled in the U.S. and the European Union, they should be delayed in Russia, too.
That brings us to the investment climate. The government has already committed to spend 400 billion rubles ($13 billion) on infrastructure projects in 2013, as a form of fiscal stimulus. Nabiullina can also play a role in improving the climate for domestic and foreign investment, once Russia’s financial-markets regulator starts merging with the central bank in August.
Given the current shortage of liquidity and collateral, a good starting point for Nabiullina would be to develop Russia’s market for securitized debt. Today Russia only has a market for trading securitized-mortgage loans. This should be expanded to include a wide range of assets, including consumer debt and loans to small and medium-size companies.
Nabiullina is well-prepared to take on these challenges. She helped as an academic to draw up Russia’s reform program in the 2000s, and she was economy minister from 2007 to 2012, a difficult period. She has an exceptional understanding of the broader macroeconomic picture and of the pivotal role that the central bank plays. The opportunity is there for her to seize.
(Andrey Kostin is chairman of VTB Group, Russia’s second- largest lender. He is also chairman of the B20 financial- stability task force. The opinions expressed are his own.)
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