Russia Nixes Central Bank Growth Mandate as Weaker Ruble

Russia rejected a proposal to pin some of the responsibility for ensuring economic expansion on the central bank and may use a weaker ruble to salvage growth and replenish the budget, Finance Minister Anton Siluanov said.

“The Finance Ministry didn’t support that proposal because it’s without substance and it blurs the lines of responsibility for economic growth between the government and the central bank,” Siluanov said in an interview in Moscow last week, referring to the possibility of a growth mandate.

President Vladimir Putin, who’s trying to halt the sharpest slowdown in the economy since 2009, highlighted the U.S. Federal Reserve’s dual mandate of price stability and full employment in a speech last December, setting off discussions among lawmakers over a wider Bank Rossii remit. Putin led a government meeting this month that decided against changing the central bank law to add a growth mandate, Siluanov said.

Russia is looking at other ways to boost growth, including a plan for the Finance Ministry to buy foreign currency on the market before sending oil and gas revenue to the Reserve Fund, one of the country’s two sovereign wealth funds, Siluanov said. Only “market mechanisms” should be used to devalue the currency, he said.

“A small weakening in the ruble’s exchange rate can play a positive role for federal budget revenue and the economy as a whole,” Siluanov said. The Finance Ministry wants to make any steps to weaken the ruble conditional on “having it done through the market and not administratively,” he said.

‘Huge Argument’

Government officials were in a “huge argument” with the central bank earlier this year over whether it should start cutting interest rates to stimulate growth, First Deputy Prime Minister Igor Shuvalov said in an interview in January. Putin’s chief economic aide, Elvira Nabiullina, takes over as chairman in a week as Sergey Ignatiev exits in Bank Rossii’s first change of leadership in more than a decade.

The current law governing Bank Rossii lists as the regulator’s three “goals” the defense and stability of the ruble, development of the banking system and the upkeep of Russia’s payments system.

Yields on Russia’s bonds have spiked since May amid a global selloff in bonds on concern that central banks will begin to back away from stimulus measures that pushed interest rates to historic lows. Russia’s ruble debt due in 2028 has tumbled, sending the yield up 75 basis points, or 0.75 percentage point, to 7.61 percent from a record low on May 6.

Ruble Slumps

The ruble weakened 0.4 percent to 31.6796 against the dollar following Siluanov’s comments, reducing today’s advance of as much as 0.7 percent, according to data compiled by Bloomberg. The currency has weakened 4 percent this year, according to data compiled by Bloomberg.

“During the past 10 years, the ruble’s nominal rate has practically remained unchanged, while prices have grown substantially,” Siluanov said. “That has led the ruble to strengthen in real terms, which is negatively affecting Russian exporters.”

Companies including VTB Group, Russia’s second-biggest bank, and United Co. Rusal, the world’s largest aluminum producer, have urged the central bank to lower rates and offer longer-term financing to bolster growth. Those calls have been echoed from within the government, including by Economy Minister Andrei Belousov. Rusal’s billionaire Chief Executive Officer Oleg Deripaska said in January that the central bank’s policies “sucked all blood from the Russian economy.”

Ignatiev’s Stance

The central bank has rejected those arguments, with Ignatiev saying the regulator will start lowering its main rates once inflation has slowed. Consumer price growth surged to 7.4 percent in May from a year earlier.

Bank Rossii is targeting a range of 5 percent to 6 percent for inflation this year after overshooting the same goal in 2012, when a drought damaged the harvest, driving up food prices. Price growth may ease to within that range by September or October, Ignatiev said this month.

“Right now there’s no need to conduct quantitative easing as is being done in other countries, because that may spur inflation,” Siluanov said. “You can’t have identical monetary policy in Russia and western countries or Japan.”

Unlike its counterparts around the world that have unleashed unprecedented monetary stimulus to strengthen their economies, Bank Rossii has held its main interest rates for nine months after raising them in September, keeping the refinancing rate at 8.25 percent at a June 10 meeting.

‘Neutral Operation’

Conducting transactions for the Reserve Fund on the market would be “a neutral operation in terms of buying and selling currency, which, according to estimates, may weaken the ruble exchange rate by 1 to 2 rubles,” Siluanov said.

A 1 ruble drop in the exchange rate may bring the budget an additional 190 billion rubles ($6 billion) in revenue, according to Siluanov. The mechanism may be used starting in August, he said.

Russia’s two sovereign wealth funds are managed by the central bank under guidelines set down by the Finance Ministry. Under the current system, the ministry’s off-market conversion of ruble revenue into foreign currency is usually made once at the start of every year, with the central bank buying rubles accumulated throughout the year.

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