Bank of Russia Governor Elvira Nabiullina's speech at the RF Ministry of Finance expanded board meeting on 20 April 2016

Dear Prime Minister, Dear Minister, dear colleauges!

I want to start by thanking all the staff of the Ministry of Finance. Throughout last year, we had to coordinate our efforts on multiple tasks, joining our efforts, and I want to tell you that we are pleased to work with you thanks to your very professional and responsible approach. We are faced up with a multitude of common tasks that we could probably class into two key areas, that is, ensuring macroeconomic stability and creating conditions for financial market development. Macroeconomic stability primarily comprises low inflation and a balanced budget, which would last longer than for one year, a sustainably balanced budget, low deficits and low public debt. And it is macroeconomic stability that, in our view, should bring about structural change and improvements in investment climate. The Central Bank regards fiscal policy as an important inflation reduction factor. Any budget review is essential to our decision making, including decisions on the key rate. There is a quite one-to-one correlation between fiscal and monetary policies: the tougher fiscal policy, the softer potential monetary policy. And vice versa. So we welcome the commitment to waive budget deficit buildup and return to a three-year budget planning, as uncertainty in the budget strategy is nothing but a pro-inflationary factor.

To quote Mr Siluanov, the Ministry of Finance is concerned about economic growth. Importantly, economic growth is as much of concern to the Central Bank, as we strive to contribute to the effort of putting our economy back on a sustainable growth track by dragging down inflation and getting it to stabilise at persistently low levels. This is because low inflation is the precondition for low long-term interest rates in the economy and a predictable business climate, which are both key to economic growth.

Recent data suggest that annualised inflation indeed totals 7.2%, and that is down twofold on the same period last year, and back to the levels seen three years ago. And this brings us closer to our 4% inflation target we plan to deliver in the end of 2017.

At the same time, the fact that we are now approaching the level of, say, 'pre-2014 normality', should be no reason to relax, and we must remain vigilant about the risk that inflation may remain stubbornly within 6%-7%. This high inflation may seem appropriate to some; in my opinion, it is totally unacceptable. Simply because it is just not the level of inflation to enable investment growth: in other words, the 6%-7% level is surely not an investment rate of inflation. We see currently that foreign markets remain highly uncertain, creating both inflation risks and fiscal risks. And we should join our efforts in making our macroeconomic policy consistent and predictable.

So why the Central Bank' target of 4%? In many developed and developing countries the inflation target is lower at 2%. However, in our view, for our economy (and we discussed the matter with the government as we were working on the Guidelines for the Single State Monetary Policy) the 4% rate is fairly acceptable. First, this level enables, in the context of structural reforms, change in the relative price ratio. Yet, this change is not as high as the 6%-7% range, which is the rate of inflation that stifles investment.

In this case, if inflation is higher or even at 6%-7%, the nominal interest rates in the economy will be higher, higher too will be risk premia, and hence the high volatility of financial assets and foreign exchange, given that volatility of financial assets and foreign exchange is as lower as lower inflation is, other things equal. This formula implies that higher inflation would trigger fewer investment projects to be repaid and investment activity to lower. Therefore, the 4% target is realistic and ultimately crucial from the standpoint of economic restructuring.

A continued conservative approach is key to 2016 budget expenditure planning to ensure long-term sustainability in public finances, given the Reserve Fund's limitations and the constraints on capital raising in foreign markets including the costs of public debt servicing. We are aware of the challenging task for the Ministry of Finance which, deprived of the capacity to build up total expenditures, should ensure that fiscal stimulus is in place regardless, and such that would be aligned with economic growth. And this means the effort of priority setting in public spending and its cost-effectiveness will get extra requirements. All of us would rather escape a scenario when public spending areas, which are most effective for structural change in the economy, would suffer from budget cuts and fiscal restraint policies.

Macroeconomic policy is an important but not the only area of »»interaction between the Ministry of Finance and the Central Bank. We are working in concert towards improvement of financial sector regulation and development of new legislation as necessary. The Central Bank has no right of legislative initiative, which rests with the Government, and therefore the Ministry of Finance is our key partner here.

Last year, we submitted a fair number of proposals to improve financial market regulation. I want to thank the staff of the Ministry of Finance for your cooperation.

And, I would like to highlight a number of priority draft laws for the near future.

First of all, this is the draft law regarding goodwill definition requirements to cover the management and owners of non-credit financial institutions. There are such requirements with regard to banks, and they may need improvement; but we want cross-sectoral regulation applied here. This is undifferentiated tough suppression of comebacks to financial markets as may be attempted by individuals with tarnished reputations, regardless of the place they have committed a violation, be that banks, insurance companies, pension funds or other financial institutions.

Although this project is of high magnitude and complicated, my hope is, our efforts will make sure it is passed within this legislative session.

The second area of our cooperation is the project of stronger requirements to be developed for the insurance sector. Insurers, as key players in the financial market, should, in our view, meet the same requirements as those applied for NPFs or banks. And this project addresses these challenges.

The third one is related to insurer bankruptcy procedure optimisation and delegation of bankruptcy administration powers to the Deposit Insurance Agency. We consider this project as part of a large effort to improve bankruptcy procedures and financial institution resolution processes.

In the nearest time, there will be several more projects on the Duma's agenda, and these concern various aspects of supervision in the financial market.

To quote again Mr Siluanov, the Ministry of Finance tasks include a stocktaking of all foreign exchange regulation and control legislation. We fully support an approach that would launch facilitated procedures for these services for conscientious induviduals and clear obstacles for those involved in unscrupulous operations. Of these projects, one is meant to simplify currency exchange for our citizens: no personal identification would be needed for transaction amounts totalling under m40,000, and identification will be made easier for transactions within the m40,000-m100,000 value range. Our view is that this draft law should be passed as a matter of priority.

Another important issue is about supervision improvements. It is important that problems be identified early on. We all agree with you that problems must be identified and stopped as soon as possible. But this will be difficult without professional judgement, and so we look to the Ministry of Finance to support the Central Bank's initiative.

And, in conclusion, I would like to highlight a draft law the Central Bank considers important for the effort to complete the creation of key financial market components and financial market infrastructure. Last year, a lot of our efforts went into the development of a national payment card system law. This is the time, in our opinion, when the Russian financial market is in need of a reinsurance Institute, a National Reinsurance Company. We have been discussing this project long enough, with some disagreement, but, in my opinion, we need to go ahead and launch this component, whereas we would thereby secure self-sufficiency and sustainability in the financial market.

In conclusion, once again, a consistent macroeconomic policy would mean a predictable business environment. And the latter is an essential condition to enable sustainable economic growth and get rid of structural constraints. I hope that the responsible fiscal and monetary policy we are pursuing will produce macroeconomic stability and conditions enabling economic growth.


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