Nabiullina Seeks Growth Options as Russian Economy Stumbles

Russia’s central bank will embrace new approaches to fostering economic growth, including by improving access to credit, Elvira Nabiullina said as she takes over the chairmanship from Sergey Ignatiev today.

“I would say the policy should be continuity, but taking into account new challenges,” Nabiullina, 49, said in an interview in her office in central Moscow before taking over at Bank Rossii. “Slowing economic growth is a reality that the central bank will need to consider.”

Weakening the ruble or succumbing to calls for lower interest rates as a quick fix to boost demand are “dangerous” options, Nabiullina said. The central bank is already contributing to the goal of promoting growth by reducing inflation and developing financial markets and shouldn’t cave in to “temporary changes or political factors” when making interest-rate decisions, she said.

President Vladimir Putin recruited Nabiullina, his chief economic aide, to take over Bank Rossii with Russian economic growth at the weakest since a 2009 recession and inflation at a 21-month peak. The first leadership change in more than a decade follows a market selloff after Federal Reserve Chairman Ben S. Bernanke’s comments last week that the U.S. central bank may start tapering its unprecedented stimulus this year if the world’s largest economy continues to improve.

Belousov, Ulyukayev

Economy Minister Andrei Belousov was appointed to replace Nabiullina at the presidential administration, the Kremlin said today in an e-mailed statement. Alexei Ulyukayev, who was Ignatiev’s top deputy at the central bank for nine years, will take Belousov’s place, according to the statement.

Investors are pricing in a smaller reduction in Russian interest rates. Three-month borrowing costs may drop four basis points, or 0.04 percentage point, in the next three months, according to forward-rate agreements tracked by Bloomberg. That’s down from as much as 49 basis points on May 22. The ruble retreated 0.6 percent to 32.9755 per dollar at 7:05 p.m.

“Many central banks are experimenting, and the long-term consequences of that aren’t yet clear,” Nabiullina said. “But a frozen view on things also carries the risks of stagnation and losing chances at growth.”

Bank Rossii has held its main lending rates for nine months since a quarter-point increase in September, while also reducing some longer-term rates at each of the last three board meetings. Ignatiev said earlier this month that policy makers were moving toward easing and that inflation may drop into the central bank’s target range of 5 percent to 6 percent by September or October.

Growth Mandate

Putin, who returned for a third term in the Kremlin last year, rebuffed calls to give Bank Rossii an explicit growth mandate for Bank Rossii, Finance Minister Anton Siluanov said this month. Lawmakers championed the measure after Putin noted in a speech in December that central banks including the Federal Reserve and the European Central Bank consider unemployment and economic growth in policy making.

“The central banks of a few countries really have gone beyond their traditional mandates in recent years and were forced to compensate for weak progress on structural reforms with monetary policy measures,” Nabiullina said. “I can’t say those policies have been able to secure a stable trajectory of growth.”

Credit Boost

Still, Russia must find ways to boost credit available to small and medium-sized businesses, and may look for ways to standardize and securitize loans to those companies, according to Nabiullina. The government wants to help reduce lending rates to 2 to 3 percentage points above inflation, First Deputy Prime Minister Igor Shuvalov said in an interview last week.

Nabiullina rejected a proposal backed by Belousov to introduce indicative lending rates that may be used to determine whether banks are charging too much.

“It’s a mechanism that would be difficult to implement, and it may have the opposite effect, reducing the volume of lending,” Nabiullina said, calling it a “Soviet approach.”

Securitizing small and medium-sized loans to widen the pool of collateral the central bank accepts in its refinancing operations would be “a more complicated path than introducing indicative rates, but more effective,” she said.

The central bank is looking to gradually simplify the 21 interest rates it now uses for refinancing operations, with the focus already shifted to repurchase operations, Nabiullina said. The refinancing rate, now at 8.25 percent, can’t be eliminated because it’s widely used in corporate contracts even after its role as a policy lending rate has faded, she said.

Cheap Money

Bank Rossii should wait to see whether lower rates on one-year loans backed by non-marketable assets and gold start to have an effect before considering longer operations, Nabiullina said. It would be “premature” to follow the ECB and introduce three-year loans, she said. Bankers including Andrey Kostin, head of VTB Group, Russia’s second-biggest lender, have argued the measure is needed.

“Banks always want cheap, long-term money,” Nabiullina said. “It’s not a fact that, having received this money, they’d immediately go and use them to finance investment projects.”

Nabiullina, who spent four and a half years as economy minister before joining Putin’s administration in May 2012, also warned against “dangerous” calls to use a weaker ruble to stimulate growth.

‘Step Backward’

A Chinese model with a fixed exchange rate and capital controls would be a “step backward” for Russia, she said. Giving the Finance Ministry the right to start buying foreign currency on the domestic market through the central bank for the Reserve Fund was “the right decision,” Nabiullina said.

“It’s not about weakening the ruble, it’s about preventing an artificial appreciation of the ruble,” she said.

Russia’s two sovereign wealth funds, the Reserve Fund and National Wellbeing Fund, are managed by the central bank under Finance Ministry guidelines. 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 amassed during the year.

The new system, which may begin in August, may weaken the ruble exchange rate by 1 to 2 rubles, Finance Minister Anton Siluanov said in an interview earlier this month.

‘Abnormally High’

The currency fell 3.2 percent against the dollar on the week to 32.7830 on June 21. The rout was exacerbated later in the week by Bernanke’s comments. The market turmoil followed what Ignatiev last week called an “abnormally high” outflow of capital in 2012. Net private capital outflows in the first quarter were $25.8 billion, almost half the 2012 total of $54.2 billion, according to central bank data.

Russia may “theoretically” increase interest rates to slow capital outflows even as that would slow the economy even further, she said. While reducing interest rates may accelerate outflows, that wouldn’t necessarily be an obstacle to easing monetary policy, Nabiullina said.

Bank Rossii will take capital flows into consideration on its rates decisions, though policy makers shouldn’t be worried about outflows that are merely offsetting Russia’s current account surplus, Nabiullina said. Russia must still fight “illegal outflows,” she added.

Nabiullina said she saw no reason yet to drop the central bank’s aim of moving to inflation targeting from 2015, while conceding there was a chance “those reasons would arise later.”

Inflation Spike

Inflation accelerated to 7.4 percent in May from a year earlier, damaging the central bank’s goal of containing price growth to between 5 percent and 6 percent this year after missing the target in 2012. Russian monetary policy should target 3 percent to 4 percent price growth by the end of her four-year term without sacrificing growth, she said.

In taking over from Ignatiev, Nabiullina will oversee the largest expansion of the central bank’s powers since it was established after the Soviet Union’s collapse as the authorities move to create a unified regulator. Bank Rossii’s remit will be extended to include the functions now performed by the Federal Financial Markets Service.

“Creating a mega regulator is also a huge challenge,” she said. “There’s a massive amount of work. We’ll have to roll up our sleeves and get to work. Morally I’m ready for that.”

(Updates with Shuvalov’s comments in 11th paragraph.)
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