Interview of Igor Dmitriev, Director of the Bank of Russia Monetary Policy Department, to Reuters News Agency on 28 December 2015

By the next policy meeting of the Board of Directors on 29 January 2016, the Bank of Russia can update its forecasts and revise the probability of the risk scenario. The regulator considers the current ruble exchange rate to be fundamentally justified and close to the equilibrium, it is going to update the press release on the key rate and make it clearer, Igor Dmitriev, Director of the Bank of Russia Monetary Policy Department, told Reuters. Presented below are his detailed answers.

OIL PRICE FALL TO 11-YEAR LOW:

‘At the moment we stick to our baseline scenario where prices return to $50 per barrel during the next year. It is currently hard to tell how long it will take: a quarter, six months or longer, but prices will rebound.

The current price fall results from the market conditions rather than fundamental factors and is not expected to be long-lasting, but, as we have emphasised, the risk scenario is more likely to materialise. At the moment, it is subordinate to the baseline scenario, i.e. less probable, and if we compare the two scenarios, the risk one is currently more likely to materialise than the optimistic one.

Nevertheless, the core of our forecast expressed in the baseline scenario is gradual price recovery. In our forecast we expect prices to be persistently low for a lengthy period, till the year-end and in early January. We tried to be as conservative as possible in the baseline scenario, thus, the oil price fall cannot be considered unexpected’.

ONGOING POLICY AND CHANGING ENVIRONMENT:

‘The monetary policy stance is tight and will stay so as long as we have to reduce inflation to reach the 4% target. However, we always emphasise that it is moderately tight, because we seek to balance targets. And we keep the economy in mind when choosing the path to cut inflation to 4%, how quickly it should be done and how active we should be in our policy. And as long as we seek to avoid considerable economy cooling it will be moderately tight.

It is difficult to act in this environment. But what kind of difficulty is that? I believe it is even more difficult for decision-makers, and we are engaged in the everlasting process of delivering underlying materials for the decision-making. It involves permanent forecast reviews and updates, search for ambiguous points, something we have missed, what may go wrong and what impact it may have.

It is not only the matter of unpredicted oil price behaviour. Even if we are right about the oil price dynamics, its impact, implications, length and depth of its effect should be mooted.

There are a lot of ambiguous points. But the main difficulty is that we have actually been elaborating forecasts since 2013, it is an everlasting process.

Initially, there were supposed to be the so-called pivot meetings of the Bank of Russia Board of Directors where the baseline forecast, the core forecast are presented and a broader range of indicators are prepared. The report covers all these issues.

However, in fact, today we prepare a full-fledged forecast with all the updates for every meeting and between the meetings as well. We check every considerable shift in parameters for its implications, response, whether we have to revise the forecast or not, whether we have to update it or not to always be on the alert. It is a hard but interesting work. At another point, we always have to keep an ear to the ground’.

PROSPECTS OF BASELINE SCENARIO REVISION ON THE BACK OF FALLING OIL PRICES:

‘January is likely to see persistently low oil prices but not a forecast revision. The baseline scenario continues to be the baseline one and the risk scenario remains the risk one. We already have a scenario which provides for low oil prices, this time we even have indicated a level of $35 per barrel. Forecast update guided by the oil price dynamics is more likely.

Should we see that the oil price fall is not a short-term one, but triggered by some fundamental factors, that it will last longer – at least a quarter – we can talk about a scenario probability revision. But in any case these are decision-makers who decide on the scenario probability’.

ANALYSTS’ ABILITY TO PREDICT BANK OF RUSSIA DECISIONS:

‘Our main objective is to make our decision clear and expectable rather than predictable. In October, analysts divided in their opinion – half of them predicted a key rate reduction, while another half thought it would be kept unchanged. This time the unchanged key rate was a mainstream opinion, but some analysts expected a cut.

Both sides employ more or less similar reasons and data. We cannot say that those expecting a key rate cut have failed or lost. We keep saying that if the situation meets our expectations we will reduce the key rate at a coming meeting. The matter is when it will be, at what meeting. It could have been the December meeting, maybe it will be a later one. Again, I cannot say that they were wrong.

Overall, our policy has become more predictable and clear. However, predicting is not an easy task at crossroads, when the external and internal climate changes the economy considerably. But I believe that the Bank of Russia’s policy has become more predictable and clear, it is better perceived and understood, and it is easier to predict the developments if the situation is not in line with the forecast. Perhaps, the most important is for people to understand the Bank of Russia’s steps in the changing environment. It allows them to make their forecasts and plans. Once the situation changes, they already know what to expect, because the Bank of Russia has explained its actions in these conditions’.

TOUGH DECEMBER DECISION TO KEEP THE KEY RATE AND SOFT FOLLOW-UP NARRATIVE:

‘The narrative seems to be soft as everybody is already used to that. On the one hand, it is really soft because we consider the baseline scenario to be the main one, and expect the situation to develop as predicted. We will be ready to cut the key rate when inflation starts to slow, when we see the risks abating. In this regard the narrative can be called a soft one.

However, at the same time, we use this narrative to explain our decision to keep the key rate, to communicate risks we faced, our concerns about inflation declining slower than envisaged by the scenario. In this regard I do not see any contradiction between the decision and the narrative. The stance of the narrative is largely soft, because we predict a rate cut if certain conditions are met. But at the same time it is tough enough to justify the decision taken’.

OBSTACLES FOR DECEMBER KEY RATE CUT:

‘Inflation risks are the key factor, and in the press release we have changed the signal of the future developments adding that we will cut the key rate if inflation risks recede. There are two key factors about inflation risks. First, external shocks and, accordingly, exchange rate dynamics, and their pass-through effect on prices. This is the key difference in the inflation dynamics between the baseline and risk scenario.

Second, inflation expectations. If we compare the baseline and risk scenario, most parameters meet those of the baseline scenario. But two parameters shift towards the risk one, these are the oil price approaching the risk scenario levels and inflation expectations.

Inflation expectations are higher than we would like to see, they are above the level that would drive faster inflation slowdown. Other components confirm the baseline scenario. In Q3, the economy showed a very good growth. Let’s look at the Q4 figures, but still we do not see any negative trends.

As for inflation, it declines slower than we need, though falling within the forecast range, closer to its upper border. There is nothing capable of bringing it up. Our forecast for 2015 is 12.8%-13.0%, inflation is unlikely to exceed 13%.

The third important inflation risks are possible supply-side shocks, e.g. the harvest. But they follow far behind other factors – the exchange rate and inflation expectations. Harvest shocks are possible given the speculations about the impact of El Nino on the world harvest, which can affect us.

The next factor in terms of weight is the revision of parameters of fiscal and tariff policy. It is a permanent risk we estimate to be unlikely to materialise, but cannot skip, because other risks can materialise through this channel.

It is hard to tell whether internal or external risks are more important. That is the reason why I have ranked inflation expectations and exchange rate shocks first. Exchange rate shocks can be triggered by external factors only. Internal and external risks are currently ranked equally, besides, they can increase each other. Therefore, it is important that these risks be mitigated’.

IMPACT ON INFLATION OF THE DECISION ON GOVERNMENT SUPPORT TO VEB WHICH WILL INCREASE DEFICIT IN 2016:

‘We look at the monetary policy as a whole and make cumulative macroeconomic forecasts. We look at the cumulative revenues, expenditures and budget deficit and recognise these parameters in our forecasting. We closely cooperate with the Ministry of Finance in this aspect. And now it is crucial to sustain fiscal soundness. The importance of this issue makes us sure they will succeed. To some extent there is nothing else to do but succeed. We do not focus on private solutions, we look at the whole picture’.

EXTERNAL RISKS:

‘The major external risks emanate from China and, accordingly, oil prices. The key external shock for us is low oil price and we consider it in out scenario. We regard low oil prices as a short- and long-term trend. As for the long-term trend, the sustainable slowdown in the Chinese economy – if its growth is below the target levels envisaged by the government – will exert pressure on oil prices. And supply-side factors such as Iran (oil supplies) refer to the short-term trend.

As for the US Fed’s policy, its latest decision was expectable and we have considered it in our forecast – both the decision and the very soft narrative. The key risk as we saw it was not the rate rise – it was inevitable – but the following policy. Abrupt normalisation could have affected emerging market assets. However, the declared gradual normalisation mitigates these risks.

Overall, the Fed’s decision has mitigated risks and uncertainty. However, our models consider the Fed’s policy’.

EMBRACING THE FED’S APPROACH TO ANNOUNCING KEY RATE MOVEMENTS IN 2016:

‘Perhaps, we will be able to announce rates with the lapse of time as confidence between the Bank of Russia and the society grows. What are the risks of exchange rate – and especially interest rate – forecasting? They arise from the fact that if we announce certain rate level, and afterwards the situation changes and develops differently, the Bank of Russia will be reproached: “You announced that level, I took a loan/opened a deposit/bought or sold currency and everything turned the other way round”. That is the problem.

Of course, we have the idea of the future key rate required to reach the inflation target, it makes a part of our forecast. We also forecast GDP, oil price and the ruble exchange rate, everything together. In future, as confidence grows, we are likely to be able to announce more evident benchmarks, but still they will be only benchmarks. I believe, the Bank of Russia articulates its scenario-linked policy decisions openly and boldly, I cannot say there is any uncertainty left’.

ON FADING EXCHANGE RATE PASS-THROUGH EFFECT ON INFLATION:

‘We expected the pass-through effect to go down and taking account of all the happenings — a sharp fall in oil prices, geopolitical factors, trade restrictions — we can surely say that our expectations come true: the pass-through effect declines.

Given the situation, it grew somewhat as compared with 2013, however, if compared with late 2014- early 2015, it had actually dropped twofold by the current moment. From this viewpoint, we observe both confidence in the national currency – whatever might be said, there is no run on the banks – and the inflow of deposits. Import substitution is underway: the less the dependence on imports is, the less tangible are these effects of influence.

All the above suggests that the pass-through effect is on decline and it is significantly lower than it could be under another exchange rate policy. Taking into account all the happenings, inflation response to the exchange rate is rather soft. Therefore, as the situation stabilises further, the concentration on domestic prices and the key rate will be observed and I am convinced that the pass-through effect continues sliding down in the next year or two’.

ON IMPACT OF EMBARGO ON TURKISH FOOD ON INFLATION EXPECTATIONS:

‘We measure them regularly and the survey held by the Institute of Public Opinion Fund, for example, does not show on the whole any increase in expectations; there are fluctuations in certain groups, but as a whole we can say that there is no noticeable reaction on Turkey yet. There is an issue what now matters most when expectations change and the significant factor is not in Turkey. Because if there had been an effect ‘grab the remaining Turkish products, while they are still in stock’, the prices would have begun to grow, we do not witness this’.

‘The impact of this factor will be perceptible within the next few months. This is a hump-shaped figure and this impact will intensify in the nearest months, then there will be a slump, when the effect is still tangible but fading away — this period is slightly longer’.

‘Any trade restriction is painful. We do not observe any lift-up in prices or unconscientious behaviour of people, who would push up prices in advance. The major channel of influence here are tomatoes and citrus fruit and there is not any distortion in the price dynamics of both of them. They are growing (in price), but we currently observe their seasonal growth. Weekly data are rather volatile, the measurements are inaccurate, and you may always find a week which runs counter to any trend. To say that it is Turkey that rolled out the price growth on tomatoes won’t be true, quite normal seasonal dynamics for late November-early December. There is a wide choice of suppliers of tomatoes and citrus fruit from other countries, from whom we may continue buying, and nothing scary lies in store for us’.

ON JANUARY INFLATION:

‘It will go down due to the base effect, but January inflation comprises inflation accumulated in 2015 minus January 2015 inflation plus January 2016 one. The question is what plus it will be? The answer is far from being unambiguous. We do not expect it to be high, disinflation processes are underway, but the situation will also show this. Assessments of trade restrictions on Turkey, excise duties on spirits from 1 January, their contribution may well be comparable with that of Turkey (0.3 pp according to preliminary estimate). As far as trade restrictions on Ukraine are concerned, which become effective on 1 January, we are not expecting material risks here’.

IF THE BANK OF RUSSIA REALISES THAT THE RATE MAY BE CUT AT THE NEXT MEETING, YOU WILL GIVE A CLEARER SIGNAL:

‘The answer is in the question. If clearly and undoubtedly, the wording may change, but not by all means. Simply I don’t believe that there will be such situation soon that one can say clearly that next time we will take this decision’.

DOES THIS MEAN THAT THE DECISION-MAKING HORIZON HAS NARROWED CONSIDERABLY?

‘No, it is always long, we always look for three years ahead and we always imagine them. We have detailed forecasts — for a quarter, for two quarters ahead. But it would be wrong to promise something. It’s not because we do not believe ourselves, but because the situation changes rather rapidly and this forecast may be perceived not as a forecast, but as s promise. A failure to keep one’s word always undermines confidence’.

AT WHAT NEAREST MEETING THE RATE IS LIKELY TO BE REDUCED:

‘At one of the nearest. We sought to disclose the conditions of the rate cut: this is inflation reduction following the forecast and decreased risks. We will watch how inflation will fall in January, but there is ‘and’ here, i.e. and decreased risks. January will show. Should the decision be made either in January or in March, we will further take into account both factors. Should we prepare the forecast anew, we will turn particular attention to these both factors.

Decision-making is not in my competence. But we are engaged in preparation for decision-making and will observe the risk pattern: whether they decreased or grew, if there is a reserve for rate reduction and how inflation behaves’.

ON RATE CUT PACE:

‘There is no obvious anchor to any value, there are no restrictions here, and it is always an issue of forecast, view of the situation, how the readers will hear this. We may go forward in any direction with both long and short strides’.

QUICK RATE CUT IN 2016 FOR THE BANK OF RUSSIA — IS IT OPTIMISTIC OR BASELINE SCENARIO?

‘It depends on what you mean by quick cut. The baseline scenario and inflation forecast is 5.5%-6.5% in 2016, our forecast for the end of this year is 12.8%-13%, i.e. we expect inflation to slow down by 7 percentage points. What rate cut do you call quick or slow? (In 2015, the rate was cut by 6 percentage points). It is difficult to judge, there are no restrictions on the pace of rate reduction or its rise. The situation will show.

Despite inflation slowing, slow rate reduction may turn out to be sensitive for economic growth and may skew risks towards growth. If we stint ourselves and say it is impossible to reduce rates quicker, we will upset the same balance. Also, you cannot speak unambiguously about very quick rate cut because of the rapid inflation reduction, since we do not know how inflation risks will be formed, what shocks will be like, and what scenario we will follow. That is why the less such restrictions are, the better, and then it is an issue of communications and a specific decision on a specific date’.

ON QUICK NORMALISATION OF BANK OF RUSSIA INTEREST RATE POLICY IN 2015:

‘We may surely say it is quick, 6 percentage points in six months, it is quick probably for any country, it is much. And what about inflation surge and exchange rate rise? Is it quick? It was comparable with the processes underway in the economy, I would answer. If we assume that the processes in the economy were quick — adaptation, adjustment — the quick normalisation will fit into the picture’.

WHAT RATE CORRESPONDS TO 4% INFLATION IN LATE 2017?

‘This rate level is not fixed, it depends on the situation. The economy, unemployment, wage level – everything does matter. At one moment the 4% inflation may be a hard-to-achieve goal, at another moment it may be an easy task.

The rate is always a path. We see the current level and assume that in order to reach the 4% inflation target the rate path should be like this. We consider the package of paths: the path of inflation reduction, the path of economic growth, paths of other variables.

We can assume, let’s take a steep or gentle rate path, and we will get quite another forecast. But everything is compared together, in the course of dynamics, not simply the 4% inflation, but the way we achieve this target. In other words, different rate levels fall on this point — late 2017’.

ON IMPORTANCE OF WORDINGS OF PRESS RELEASES ON KEY RATE:

‘We certainly call on the public to read our press releases carefully, but without fanaticism, and not to search for hidden meanings and allegations. Sometimes words may change for reasons of the Russian language. The body text may contain clarifications, which emerge from the Russian language rules, to make it easy to expound and to understand. It is also very important, since you may write accurately from the mathematical point of view, but it will be excessively formal and far from being understandable, while clarity is always certain diffusiveness. You may distinguish between soft or tough narrative, at this level you may understand the use of words and make it clear for yourself — it is the toughening of the narrative or the softening of the narrative.

The signal phrase in the preamble of a press release is probably the most precise and tough thing. Every word there is really very important and always carries weight. The preamble is not simply sentences from the text placed above, they are rather tough. As for the text, yes, read it carefully, but without fanaticism’.

‘I am not going to disclose the preparation of press releases, but I can assure you that they are not written on a napkin after the board of directors meetings. Everything is being checked thoroughly, and verified how the audience will perceive it. It is important to announce our forecast and explain what are the grounds for the decision, and, what is no less important, to make it understandable for the audience. The closest attention is given to the press release along with the forecast. The press release, statement by the Governor and Monetary Policy Report are the most important things’.

ON PRESS RELEASE READABILITY:

‘Upon the press release publication we consider how the mass media highlights the event, how analysts and investors understand the decision. We always check whether our message has been heard and understood. However, we do not expect the literal interpretation, but the perception as a whole: the Bank of Russia expects such-and-such trends.

We check the message we wanted to communicate, what can be improved in the communication next time, and what can be emphasised not to miss the thought next time. The thought may be infused: either we may outwit ourselves or the readers may outwit themselves and interpret the phrase in their own way.

We consider this, and next time this may also be the reason for changing the wordings, not because something has changed, but because we realise that the previous wordings are not quite clear’.

ON CHANGES TO PRESS RELEASES IN 2016:

‘In the first quarter of 2016, we are going to present a renewed press release format. We shall try to make it simpler and clearer. The emphasis will be made on clear wordings to make the message unambiguous. We have already started preparations’.

‘Communication is the most complicated thing in the current work. A forecast is surely difficult to be made: there are mathematical models, search for new decisions and other things, but it is within the central bank. Communication constantly requires receiving a feedback, different people react in different ways, you cannot please everybody, the audience is rather large and different. To establish correct communication, to be interpreted unambiguously, and to make our signals be heard – this seems to be the most difficult task. We shall pay our attention to this in the next few quarters or, maybe, years’.

DRIVERS OF THE START OF THE RUSSIAN ECONOMIC GROWTH:

‘The issue of growth triggers raises one of the main uncertainties. At the same time, we have lived through another very important uncertainty, i.e. the uncertainty regarding the economy’s reaction to the shocks occurred. The economy responded by a decline, though not so deep, as was expected by us and other market participants. From this perspective, the uncertainty of the scale of the economy’s slowdown is no longer relevant. If this uncertainty emerges once again, it won’t be as sharp, as earlier.

We are facing now another issue, what comes next? How will the economy recover? One way is the demand channel, it is evident; we have observed it earlier. This channel seems to be the most clear: it appears as soon as consumers calm down a little, get used to new shocks and are ready to consume again. This, in turn, will push output, income and, eventually, consumption. The problem here lies in the fact that there are few sources of this demand. Their effect will be punctuated and not large-scale.

Speaking about the budget, it does not seem possible that any support for consumption will come from increase in expenditure. And it is highly improbable that there will emerge noticeable external demand for Russian merchandise and, primarily, for raw materials, as neither global economy, nor overall supply provides evidence in favour of such demand. We cannot expect that the internal demand will demonstrate a robust growth. What can serve the basis for this growth? Nominal wages have been growing ever so slowly, their annual growth rate is near-zero. Real wages have dropped markedly across all economy sectors.

Maturity of large-value deposits with high interest rates might spur some increase in consumption, but this factor is unreliable. Just imagine, you withdraw your deposit. Given that you are not certain about your income over quite an indefinite time-span, it is highly improbable that you will spend the whole of the deposit. In this situation, it seems more logical to put money aside, to save it, rather than spend it. If you opt to convert your deposit into foreign currency, you will be faced with the risk of exchange rate expectations and their unclear dynamics undermining your certainty in future yields, if any.

In this regard, some punctuated support for consumption may be rendered by annual bonuses, but under current market situation, the question remains whether they will be large and meaningful this year. They will play their role, though the extent of its importance is not clear to me. Besides, one should bear in mind that it is a closed system, i.e. somebody’s gains mean other person’s losses.

Summing up, I can say that the sustainability of the demand-side growth is not evident for me. The role of demand may be only punctuated but not overall.

Speaking about the supply-side support, it unfolds right now. It works in the following way: while gradually adapting to new conditions, manufacturers and service providers anticipate that, over some time, consumers will also calm down and get used to new reality and, what is very important, to new income levels. This will set grounds for the future recovery of demand: first very tentative and for certain group of products only, acting via the increase in investment and the build-up of stocks. This will lead to a certain growth in output and, eventually, to increase in revenue and demand. But, in our opinion, the first step will be made by manufacturers and service providers.

What will made them sure of future demand? Optimism, simple adjustment to the situation, because it is impossible to live without any hope for improvement, for in such case it would be better to stop business. Figuratively speaking, people should never start a business without a firm belief in the future demand for their goods and services.

There is one very important aspect we would like to stress: this recovery will be punctuated, it will not evolve in the whole industry or economy sector, it will happen with this or that product. And the effect of such recovered product may be rocket-like, e.g. the punctuated effect of cheese recovery within the meat and dairy industry. This industry performs better than other industries, but within it, the cheese items outperform all the other commodity groups. Another example, inside the exports, there is pulp-and-paper industry, and within this industry, there is chalk-coated paper. Small as its meaning might be for the economy in general, still this industry ‘feels’ good. The same is true about the extraction of several non-metallic minerals, e.g. chalk, the situation with this product is better. As a result, such better performing sectors need more transportation services. This is exactly via this chain effect – from one product to another – that the recovery will gain traction.

The same trends are observed in the regional analysis, which is becoming an important focus of our forecasting. It facilitates understanding the economy’s current trends, not only judging by the level of Б3.8-3.9% at year-end, but also the current and future situations in various regions. With the help of this analysis, we can identify growth areas inside regions, e.g. for the Rostov Region, the food industry is definitely a growth area. It is too early to make such assumptions for the whole country, whereas it is possible for a specific region. If a tendency starts in a region, this generates demand in several neighbouring regions, and vice versa, consumption leads to a gradual emergence of a growth mechanism.

The third quarter provided evidence confirming this trend, a separate thematic box on import substitution and exporting sectors was devoted to this issue in the Report. We prepared this box for several months in an attempt to make it persuasive in conveying our message both for ourselves and for the public.

We see this evidence. If it is disregarded, one may probably hear other arguments, including pessimistic ones. If this is the case, we will have to get ready for a prolonged stagnation. It does not mean that we do not prepare a recession forecast, because it is discouraging. The thing is that we really believe in growth points and we see them. In their turn, they will create new growth points, leading to growth areas, which will become overwhelming, thus generating growth stimulus for the economy. We base our scenario and forecast on this assumption. However, it is still possible not to believe in it and remain very convincing’.

THE TRUST IN IMPORT SUBSTITUTION IS NOT ENFORCED FROM THE TOP

‘It is a very important element. We can see that not only import substitution, but, in the first place, exporting sectors used to remain outside of the main focus of attention. But these sectors have advanced tremendously. And, whether political motives are or are not involved, this is the subject matter of communication. Reality may be portrayed as it is, thus giving way to the self-reproduction of negative processes on a mere assumption that some people said that everything might go in a wrong direction. It seems, that the optimism of policy-makers is infectious, therefore it will be thoroughly incorrect, if we, or people engaged in the implementation of policy, do not believe in our economy’.

ON THE RUBLE’S EXCHANGE RATE

‘As it is clear now, the ruble’s exchange rate is near equilibrium or fundamental values. This may be established using various theoretical methods, but it is generally close to these values. There are no imbalances in the exchange rate, which has been facilitated by the floating exchange rate regime. The ruble’s volatility is declining, while economic agents are adapting to external situation. There are no any significant deviations of the market rates from the fundamental level, nor there are deviations capable of distorting inflation processes’.

ON EXPECTING RUBLE’S TRADITIONAL APPRECIATION AT THE START OF THE YEAR:

‘We expect traditional balance of payment dynamics, whereas consequences for the exchange rate shall be set by everyone independently and individually’.

ON THE RUBLE PRICE FOR OIL:

‘We do not use the ruble oil price in forecasting. When communicating with the economic agencies – Ministry of Finance and Ministry of Economic Development – we do not use this term, we proceed from the oil price accepted by the global markets’.

ON CONDUCTING INTERVENTIONS TO COUNTER THREATS TO FINANCIAL STABILITY:

‘A lot of factors remain. We have already said that this should be specific exchange rate dynamics leading to stable depreciation expectations, elevated demand for cash foreign currency, growth in the dollarisation of deposits and a considerable deterioration in the financial solvency of banks and enterprises. What differs dynamics from a mere change? If the exchange rate moves up and down, up and down, is it dynamics? Yes, it is. And as for shooting up and rushing down, is it dynamics? Yes, it is dynamics, too. Similarly to the case when I implored to treat the press release without fanaticism, I again ask that the word ‘dynamics’ is also treated rationally. We observe cumulative exchange rate movements over a definite period of time’.

ON RESERVES ACCUMULATION:

‘We are still set on accumulating reserves, but we will be guided by the situation. The forecasts assume a possible accumulation of reserves over a long-term horizon only under the optimistic scenario (it is based on the oil price growth to $75 per barrel). Any accumulation in the short-term run will depend on the situation and on the behaviour of other balance of payment components, and also on the oil price trend. There are no rules or restrictions to start/to refuse starting the accumulation of reserves. We will watch the situation and act accordingly. The main principle is to do no harm’.

ON FX REPOS:

‘I cannot give comments on participants, but the debt structure is shifting towards shorter operations. Overall, the demand for 12-month refinancing facilities is low; one-month instruments are more preferable. The debt on one-month refinancing is also declining, the rate stopped being attractive, banks got used to new conditions, and there is quite weighty amount of foreign currency liquidity in settlement and deposit accounts, making this instrument less interesting. No one needs and no one is interested in acquiring costly liabilities which are both very volatile and unpredictable.

Banks do not think it necessary to build up their debt on FX repos’.

ON EXCESS FX LIQUIDITY HELD BY LARGE BANKS:

‘From the perspective of reaching the inflation targets, I do not anticipate any excess FX liquidity capable of hampering or influencing macroeconomic stability. The issue of banking sector stability shall be addressed to my colleagues’.

ON RUBLE LIQUIDITY:

‘To my mind, at the end of the year everything is all right; the rates are normal and remain within the corridor bounds. Overall, the year-end situation is always characterised by somewhat higher volatility and by elevated uncertainty, and the same is true about this year. We are not expecting any surprises to emerge. In fact, we have not conducted fine-tuning operations since June. Though, if need be, we do not rule out these operations’.

ON HIGH DEMAND AT AUCTION-BASED RUBLE REPOS:

‘If this demand and high interest rates (auction-based) were determined by the market, this would call for some actions, e.g. fine-tuning operations. At present, the interbank market’s rate is within the Bank of Russia interest rate corridor, keeping rather close to the key rate. It means that we only need to take into consideration this factor (high demand), and do nothing about it.

According to our data, this demand for repos is mainly generated by medium and small banks. They fear that they will not be able to borrow in the interbank market, so they obtain excess liquidity from the Bank of Russia for the subsequent placement of these funds in the interbank market, which brings the rate back closer to the key rate. Therefore, we do not see any disruptions in the functions of the interbank market. Similarly, we do not observe any situation hampering the attainment of our operational target: maintaining money market rates close to the key rate’.

ON DEPOSITS WITHDRAWAL BY THE TREASURY:

‘During all recent years and, in particular, during the last month, the scope of our interoperation with the Ministry of Finance and the Treasury has been growing steadily. We are working in close contact on a day-to-day basis, discussing situation in the money market and liquidity gaps, so we keep track of all and any reductions in the volume of the Treasury’s deposits with banks, and we coordinate our actions.

The amount of withdrawals from deposits shall not be equal to the increase of limits on Bank of Russia repos, because all the cash withdrawn from deposits is afterwards spent via the channel of expenditures which are traditionally high at the end of the year. So, from our perspective, we do not see any noticeable change in limits (on ruble repos), because all the cash taken out will be spent. The Reserve Fund is an accounting phenomenon. The fact that some funds have been converted does not signify that they will be spent immediately. The real meaningful thing is actual budget expenditures.

We are monitoring all these flows, bring them together and disclose their aggregate form in the liquidity factors. This exercise has been performed for several years: we inform about the amount of cash withdrawn by the budget / provided by the budget, we disclose all these factors. But inside the budget, there are dozens of various smaller movements; it is not feasible to disclose all these flows’.

ON ONE TRILLION RUBLES IN CASH IN DECEMBER:

‘During this period, the demand for liquidity is traditionally high, with the still bigger portion of demand shifted towards December-end. We might even undershoot the traditional trillion, i.e. there is nothing unexpected here. It used to be a purely seasonal phenomenon, and it will remain as such, without any surprises. The question on the object of spending shall be addressed to consumers’.

ON THE MONEY MARKET IN JANUARY 2016:

‘January is traditionally the most calm and orderly month in terms of liquidity and its accessibility; there may even be occasional one-off periods of excess liquidity. This year, we do not expect any extraordinary events. The excessive ruble liquidity emerging at the beginning of the year will dissolve gradually; the demand for liquidity will traditionally transform into the supply of liquidity; a reverse process will take place. This period is rather calm for the money market, because all players have sufficient funds and the interbank market operates as normal without any extraordinary developments’.

ON BUDGET EXPENDITURES AT YEAR-START:

‘The question on the speed of budget funds consumption shall be addressed to the recipients of these funds. Though we do not anticipate any changes in the pattern of payments; this year, the spending is more uniform and well-balanced, with its bigger portion shifted towards the first quarter. Overall, the situation has levelled out throughout the year. The process is also facilitated by the Bank’s interaction with the Federal Treasury via the placement of deposits and via the management of the Treasury single account, therefore the adjustment of budget flows will improve from the point of view of their impact on the banking sector and liquidity’.

Elena Fabrichnaya

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