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Speech by Bank of Russia Governor Elvira Nabiullina at the International Conference ‘Modern Auditing: Problems and Prospects’

Statement by Elvira Nabiullina, Bank of Russia Governor, in the Follow-up to the Board of Directors Meeting on 16 December 2016

 

Today, the Bank of Russia Board of Directors has decided to keep the key rate at 10.00% p.a.

Overall, the economic performance meets our expectations. Inflation is slowing down in line with the forecast and the economy is taking up a recovery path. Fiscal policy-related inflation risks have abated. Inflation expectations are easing up, though remaining above the levels compatible with the inflation target. The global economic and political developments of recent months have shaken global markets. Nevertheless, our medium-term outlook has mainly remained unchanged.

The expected inflation slowdown will allow us to consider a key rate cut in the first half of 2017. The pace of the key rate reduction will meanwhile sustain moderately tight monetary conditions. It is still essential for inflation and inflation expectations to abate steadily.

Let me dwell on the factors we considered in our decision-making on the key rate and its further path.

First. Inflation is slowing down in line with our baseline scenario driven by demand-side restraint, slower cost increase and ruble appreciation.

Our estimates as of 12 December suggest that the annualised growth of consumer prices fell to 5.6%. Accumulated year-to-date inflation stood at 5%, a historic low, by the end of November. We expect inflation to range between 5.4%  and 5.8% by the year-end. Inflation is performing even better than we expected a year ago, when we forecast it to be about 6% by the end of 2016.

Prices for all key groups of goods and services have been growing slower in the recent months. Inflation deceleration has become more uniform across regions. We used to be concerned about seasonally adjusted monthly price growth, but in October and November it showed a decline, too.

Food inflation slowed down considerably on the back of heavy crop. Growth rate of service prices is contracting in both administered tariffs and privately provided services. Non-food inflation is in decline, but it is still insufficient to signal sustainable disinflationary processes. Its persistence at an elevated level may point to a weakening in demand-side restraint. Also, it may partially result from a longer response of non-food prices to external shocks and ruble depreciation, as compared with food prices. Such effect manifested itself in the aftermath of the 2008 crisis, and we cannot rule it out now.

We take account of a number of factors which inflation slowdown is driven by. Some of them are temporary in nature. These are ruble appreciation seen in the recent months amid talks on oil production cut, and the above-mentioned crop. These factors will continue to exert their influence in the months to come, but will eventually abate.

Let me emphasise that when we say that some factors are temporary, we do not mean that their impact will necessarily reverse. These are factors with short-lasting effect of about several months. Their scale and focus largely depend on the market and natural phenomena, e.g. shifts in expectations and sentiment in foreign markets. We cannot expect these factors to be everlasting and  always favour inflation reduction.

Therefore, we focus on sustainable factors of fundamental, i.e. less changeable, nature. These factors depend on preferences and the specific conduct of economic agents, households and businesses. Generally they are not subject to fast and abrupt changes. It is crucial that we can influence these factors through our monetary policy. They include demand, inflation expectations and costs.

Consumer demand remains sluggish and continues to contribute in inflation slowdown, though to a lesser degree. Real wages have been rising against the past year figures. However, conditions for sustainable growth of real income are yet to be built up. Households are retaining the propensity to save, underpinned, among other things, by positive real deposits rates. The modest increase in sales of some durable goods results from consumers’ willingness to make major purchases they have previously postponed.

Inflation expectations of households are ebbing; however the pace of this decline is insignificant and unaligned with inflation slowdown. Inflation expectations are yet to take a sustainable downward path. Nevertheless, I should say that inflation expectations of the business community have dropped considerably. Market participants and businesses are more responsive to changes in the Central Bank’s policy and the ongoing contraction in the price growth.

Another inflation reducer is a slowdown in producer price growth, which partially resulted from a moderate cost increase. Inflation and inflationary expectations reduction restricts companies’ capability to pass through their costs to prices. The outlook for lower price growth under monetary policy measures boosts further cost cuts and production efficiency.

Prices for raw materials, which have been sustainably low for quite a while, and low rate of tariff indexation by infrastructure companies also contribute to producer price decrease.

Second. Monetary conditions remain moderately tight, favouring ruble deposits and constraining demand for loans.

Nominal rates are gradually easing, driven by the key rate cuts in June and September. Real rates however remain high which means that nominal rates are considerably higher than inflation expectations.

As we conveyed our intention to maintain the key rate through the end of 2016, market participants revised their expectations of the key rate cut. As a result, yield curves in the financial sector shifted upwards. That helped maintain tight monetary conditions necessary to deliver on the 4% inflation target by late 2017 and stabilise inflation at about this rate, as well as drag down inflation expectations.

Overall lending activity remains weak as the annual growth in lending to the real sector has slowed down to levels close to zero. Banks take a cautious approach when selecting borrowers and adhere to overly rigid requirements for new loans. Borrowers themselves remain conservative. This is related to the persistence of demand limitations and a heightened debt load in individual sectors. The bad debt situation is meanwhile gradually stabilising.

As for retail lending, it has seen a marked decline over the past two years. Now this segment is beginning to recover at a pace more rapid than corporate lending. The scale of this process does not impede the decline in inflation. At the same time, growing retail credit, should it be markedly ahead of economic recovery, may bring risks to price stability. If it persistently outruns rising household incomes, it will also bring risks to financial stability. We will continue to watch closely the developments in this segment.

The forthcoming transition of the banking sector to a structural liquidity surplus will not make any meaningful impact on monetary conditions. In order to absorb surplus liquidity, we regularly hold deposit auctions, maintaining money market rates close to the key rate. Doing so, we retain the entire capability to influence interest rates in the economy through our monetary policy toolkit.

Third. The economy is gradually moving towards a recovery phase, which is consistent with the Bank of Russia’s baseline scenario. The recovery in business activity is however slow and varies across sectors.

The paces of annualised GDP decline slowed down in the third quarter to 0.4%. This was a match to our expectations. Annual GDP is set to decline 0.5-0.7%. GDP decline on a quarterly basis stopped in the third quarter as industrial output posted solid growth in October-November on the previous month, so we can expect slightly positive quarterly GDP growth rates in the current quarter.

Even so, the upturn in production and investment activity has yet to become across-the-board. We note the positive impact from import substitution and the advancement of non-oil and gas exports; yet, these developments are still fragmented in nature. In this way, as regards the manufacturing sector, the rebound is ongoing in the production of individual investment and consumer products, in particular, household appliances, footwear, pharmaceuticals, furniture and office equipment. However, the overall positive contribution of such products to industrial production is still small.

In the labour market, the situation is unchanged. The rate of unemployment is sustainably low.

The fourth consideration for us was changing inflation risks. The dynamics of inflation expectations remain a concern to us. At the same time, we note that the uncertainty as regards budget strategy has declined.

As we noted, households’ inflation expectations are trending lower, yet not as quickly as we want them to. More so, inflation risks are connected with the potential decline in households’ propensity to save, as well as with the impact from the ever-changing external environment that affects prices and expectations through currency exchange movements.

In the meantime, clarity has emerged as regards the specific dimensions of fiscal policy, so these risks have receded. The planned indexation of salaries, in accordance to the President’ May decree, and the one-off payment to pensioners will make no substantial impact on inflation. We expect the approved fiscal consolidation and the moderate indexation of tariffs and payments to be implemented, which will help slow down inflation. Adherence to the formulated budget strategy is crucial in case of oil price increase as well. More substantial than planned government spending growth may lead to inflation risks build-up.

Fifth. The recent development in external markets significantly boosts the odds for the higher oil price scenario, especially short term. Having said that, our mid-term forecast in its key points is unchanged.

The two key events in the world which recently weighed in on global markets include the US presidential election results, and the OPEC and other exporters deal to reduce oil production.

Once the joint impact from these events is assessed, it seems more probable that the higher oil price scenario may materialise. Yet, we remain conservative as we formulate our forecast, assuming that annualised price of Urals crude will average $40 a barrel over the whole forecast horizon.  We need time to estimate the impact of various factors on oil market developments. This includes the extent to which the production cut deal will be observed; what will be the conduct of non-OPEC suppliers and that of shale oil producers; what will be the dynamics of global demand and the US Fed policy. We should not jump at conclusions.

We admit that oil prices may climb somewhat above the $40 mark a barrel in 2017. However, our vision of the situation and our monetary policy stance will mainly remain unchanged considering that the Russian economy’s reaction to external fluctuations is now weaker. This is confirmed by the results of 2016. Although the external conditions were notably worse than those in the baseline scenario we released a year ago, both GDP and inflation came in close to the readings we predicted in this scenario.

GDP growth rates in 2017 are set to enter positive territory provided that the baseline scenario materialises. In the next two years, economic growth will accelerate to 1.5-2%. The economy may well post higher growth rates in the event structural reforms are implemented.

Over the forecast horizon, our current account balance is set to decline gradually, albeit remaining positive. Net private capital outflow is expected to be low in 2016 at less than $20 billion. Moving forward, they are set to become small by historical standards, standing at $25 billion at most.

The economic recovery will not come with a rise in inflationary pressures from the demand side, even though consumer spending as such will grow. Maintaining a moderately tight monetary policy stance is to help in sustaining a saving behaviour model.

I will emphasise that our objective goes far beyond the simple task to deliver on the 4% inflation target in December 2017. We seek to ensure that inflation is subsequently maintained at this level; to enable this, it is critical that inflation expectations are on a sustainable downward path.  We will take this into account in our monetary policy decision making in 2017. We cannot stifle minor inflation fluctuations altogether, and it makes no sense to do that (it even could do harm). It is critical that average price growth rates are low and never substantially deviate from 4%.

Consistently low inflation is set to be among factors enabling extended planning horizon of economic players. This will help implement projects with long payoff periods and favour the buildup of long-term money, a prerequisite for economic success.

Q&A session for media

Reuters, a news agency:

Could you please explain if there is any message behind the substitution of six-month periods for quarters in your press release?

Another question is about Rosneft, if I may. What do you think about the transparency of this deal? Did you advise to Rosneft on currency conversion? Could you give us the details, if possible? After all, dealers witnessed large sales by Rosneft yesterday.

Elvira NABIULLINA:

The substitution of the first six-month period for the first and the second quarter is purely technical. However, we believe the key rate is more likely to be reduced in the second quarter, than in the first one.

As far as Rosneft is concerned, the company made its plans public in advance, including the bond placement in the Russian market. Many people must recall the developments of December 2014 and draw a parallel with the current situation. I believe that the company has also learnt its lessons from that experience. These deals are absolutely transparent to us.

As for the currency conversion, we do advise to Rosneft in order to avoid short-term fluctuations in the FX market following the conversions.

Rossiyskaya Gazeta, a newspaper:

If inflation hits the target within a year, what equilibrium interest rates will it bring and when? What rates will the sustainable 4% inflation bring? Thank you.

Elvira NABIULLINA:

We estimate the equilibrium [real] interest rates at 2.5–3%. If inflation and especially inflation expectations reach the 4% level (when inflation sustainably holds at 4% and inflation expectations are anchored at 4%), the equilibrium [real] interest rate will be 2.5–3%. However, these rates may be higher until we bring inflation and inflation expectations on a sustainable path. We studied the experience of other countries, which had actively pursued an inflation reduction policy. They maintained rather high real positive interest rates for a long period of time to drag inflation expectations down. Therefore, we cannot say when it will happen. If we see that inflation expectations have anchored steadily in December 2017 (which is unlikely in such a short period of time), it will be possible. However, we expect inflation expectation anchoring to take a little bit longer.

Bloomberg, a news agency:

Two questions, if I may. The first one also concerns Rosneft. Today, the Central Bank has announced that it held an overnight FX swap and a two-week FX swap, which had significant volumes. Some analysts link it with currency conversion for Rosneft sale and money transfer to the budget. How could you explain such a large volume? How do you assess the situation with FX liquidity in December?

The second question. Your optimistic scenario provided for a possibility of [the Central Bank’s] entering the FX market to replenish [international] reserves in case of higher oil prices. Are current developments in line with this scenario? Can we expect the Central Bank to resume currency purchase to replenish reserves next year? Thank you.

Elvira NABIULLINA:

Thank you. We really registered strong demand for FX swap transactions yesterday. We exhausted allotment limits on overnight transactions and for the day ahead. We link the elevated demand with the markets’ reaction to the Fed’s decision on the rate hike, and seasonal increase in demand for such instruments typical of the month-end. That is how we see it. However, this demand has already been exhausted today.

As far as the situation with FX liquidity is concerned, overall it is normal. However, as I have mentioned, we usually register an increase in demand for some instruments, mainly FX swaps, in the end of the month. We will take it into account when offering our instruments. However, the situation with FX liquidity is absolutely normal.

As for the possibility of reserve replenishing in 2017 – as you will read in our Monetary Policy Report – our optimistic scenario really provides for a possibility to purchase foreign currency to replenish our international reserves. Neither the baseline nor the risk scenario envisages that. Only the optimistic scenario with higher oil prices stipulates such possibility. However, we need time to assess to what extent the higher oil price scenario can be considered as a baseline one. For now, our baseline scenario provides for the oil price at $40 a barrel on a three-year horizon. Let me repeat that the actual price may be higher than that in 2017. However, we need to assess to what extent prices can be sustainably above this level on a three-year horizon.

Vedomosti, a newspaper:

You have mentioned that your data suggest a drop in inflation to 5.6% as of 12 December, but at the same time you forecast it to range between 5.4% and 5.8% at the year-end. It means that price growth may speed up. Could you please explain why and under what circumstances it is possible?

I also have another question. Inflation has slowed more than twofold as compared to December last year. How much has monetary policy contributed to this deceleration, in your estimates? Does it account for more or less than 50% of this slowdown?

Elvira NABIULLINA:

Well, thank you. We have really revised our year-end inflation forecast slightly downwards. We used to forecast inflation at 5.5–6.0% and now we predict it to stand at 5.4–5.8%. Why is it so? The recent week has seen quite volatile inflation due to, among other things, households’ behaviour, Christmas and New Year shopping. In addition, weekly inflation data do not allow us to forecast monthly inflation. You see, monthly inflation was below the total of weekly inflation in recent months because the range of goods to register prices varies. Therefore, we are rather conservative in our inflation forecast. However, inflation is more likely to be closer to the lower border of the suggested range than to the upper one.

We believe that our monetary policy has made a considerable contribution to inflation reduction. It is hard to give a percentage estimate, because many factors dragged inflation down, but we consider monetary policy to be the decisive one. In our analysis we explain why it happened and what factors were behind it. We influenced and tried to influence people’s behaviour and preferences. Monetary policy largely stands behind households’ propensity to save, though it is not the only factor.

Russia-24, a news channel:

In terms of bank resolution, a special fund is going to be founded, which is set to cut resolution costs by 30%. What will allow saving money and who will be the fund’s members? Thank you.

Elvira NABIULLINA:

We really have suggested a new mechanism of bank resolution, because the mechanism we have applied over the past ten years, though being quite efficient at certain periods of time, is almost exhausted and we consider it to be less effective for the economy. Why is it so? Currently we use a credit resolution mechanism. We issue a preferential loan to a turn-around manager. The turn-around manager, or an investor as we call it, places these funds at market rates and capitalises the bank from this margin. The undercapitalised bank may stay in the market for a long period of time. That is a negative consequence. When we allocate funds directly to the bank’s capital, this amount will definitely be smaller. That said, funds will be forwarded to the bank’s capital rather than used to earn from lending.

Who will head the fund? The law is not adopted yet. First the law should be adopted and afterwards we will discuss it.

Interfax, an agency:

Two questions, if I may. Can you provide your estimates of banking sector profits in 2017? Banks have shown overall good profits in 2016. What will form their income it 2017? Lower provision expenses? Because interest rates will go down, as well as margins. Does the Central Bank have any forecast for the household deposit market in 2017?

The second question concerns the Central Bank’s strategy for extending the Lombard List, given that the system will shift to structural liquidity surplus next year. Will the Central Bank be more prudent in including securities in the Lombard List? Does it plan to revise the calculation of N3 ratio? Thank you.

Elvira NABIULLINA:

This year we have observed a recovery in banking sector profits. Profits expectedly dropped last year, because banks lost net interest income and had to create large provisions, as some assets shifted to the category that required larger provisions. This year banks have enjoyed higher profits of about more or less one trillion rubles, because they have restored their interest incomes and created fewer provisions. We checked why they created fewer provisions. That was not because either we as a regulator or banks have become less demanding to creating provisions. Banks really created enough provisions for all troubled assets last year and issued new loans more conservatively, at tighter terms. Therefore, the newly created provisions decreased for objective reasons. We can see that banks are prudent and careful in their risk management when issuing new loans. We do not expect provisions to grow sharply next year. I believe that the profit will be equal to this year readings. It is a good base, when we speak about bank profits it is clear that we also mean a base for bank capitalisation. Therefore, it is a very positive factor for the development and stability of the banking system.

In the deposit market, we expect household deposits to continue to grow though at lower rates than in 2015. Deposit growth contracted slightly in 2016, and our preliminary estimates suggest that deposits will show similar growth.

As far as the Lombard List is concerned, we have been expanding it rather actively over the past two and a half years. In fact, we conducted pro-cyclical policy to meet banks’ demand for refinancing. Now we can see that this demand for refinancing has contracted, is contracting and is likely to continue contracting. Therefore, we will revise, softly and steadily, our requirements for assets to be included in the Lombard List. Certainly, the revision will affect only new securities primarily through higher rating requirements.

We have not discussed changes to N3 ratio yet.

RIA Novosti, a news agency:

Are you going to revise this year forecast of capital outflow on the back of Rosneft privatisation? Thank you.

Elvira NABIULLINA:

Certainly, we estimate capital outflow to decline below $20 billion, to about $17 billion. All else being equal, we expect Rosneft privatisation to bring capital inflow. Let me repeat, all else being equal, we expect capital inflow. However, it is yet to be seen if it will be registered this or next year. It may be partially registered this year and partially next year. As I have mentioned, it is important for us to avoid short-term volatility in the domestic market. Of course, the whole amount will not be registered as capital inflow this year.

Reuters, a news agency:

Does the Central Bank still intend to diversify reserves through, among other things, gold purchases?

Elvira NABIULLINA:

Yes it does. We have always relied on reserve diversification and we still do. Therefore, we have gold in our reserves. However, we do not disclose plans about asset shares.

Izvestia, a newspaper:

Ms Nabiullina, can we return to your comment about inflation? Is it right to suppose that this December may see a so-called year-end effect that may push inflation upwards? What can ultimately bring inflation down to 5.4%?

The second question is to clarify the issue of the international reserves. Have you already introduced renminbi and what is its share?

Elvira NABIULLINA:

As for the year-end effect, inflation will not necessarily increase by the end of the year, because in previous years this effect manifested itself in earlier weeks. We registered inflation at o.1% in the past weeks. However, it is still difficult to forecast the developments of the last weeks of the month. We cannot impact on them with monetary policy measures because of their lagged effect. We are influencing next mid-year inflation and inflation expectations. That is why we keep this range. However, let me repeat that inflation is more likely to be in the lower range of this corridor between 5.4% and 5.8%.

As far as the international reserves are concerned, the IMF really decided to include the renminbi in the international reserves and we did it. We will disclose its share in our reports only twice a year.

TASS, a news agency:

Ms Nabiullina, given the situation in the oil market, what do you think about materialisation of the pessimistic scenario? Have you revised the underlying oil prices?

My second question is of a different kind. Does the Central Bank have any concerns about banks in Tatarstan, the situation in the republic? Thank you.

Elvira NABIULLINA:

We believe that the pessimistic scenario is less likely to materialise in 2017. However, we have preserved the parameters of the previous risk scenario – $25 a barrel – in our forecast. In the previous issue of the report in September we considered this risk to be low, now it has decreased further.

As for the situation in the Tatarstan banking market, as a regulator we do not comment on individual banks, as you may know. I just can say that we have appointed a provisional administration to Tatfondbank and imposed a moratorium on payments to creditors. It means that households will be able to receive their money within the insured amounts until the New Year holidays.

RIA Novosti, a news agency:

My question will be about personnel affairs. As a result of the management reshuffle in the Central Bank you have taken charge of monetary policy. Could you please clarify if you are going to have a deputy governor to supervise monetary policy issues with you?

Another question, if I may. Earlier in December you told the State Duma that the Central Bank’s objective was to minimise the impact of ruble depreciation on inflation, pass-through effect on inflation. However, the ruble is getting stronger. How does the Central Bank assess ruble appreciation and the pass-through effect of the ruble strengthening on inflation reduction? Thank you.

Elvira NABIULLINA:

There is not going to be a deputy governor to supervise monetary policy.

The statistics show that the pass-through effect has decreased and now stands at roughly 0.15, maybe even less. Mr Dmitriev may correct me.

However, the pass-through effect varies depending on whether the ruble weakens or strengthens. When the exchange rate depreciates the pass-through effect is usually more pronounced than in case of its appreciation. Nevertheless, we take different developments into account when making our key rate decisions. However, let me remind you that we are rather conservative in our oil price assumptions in the baseline scenario.

Reuters, a news agency:

You have once said that the Central Bank will try to take important monetary policy decisions at its pivotal meetings. Will this approach hold in 2017?

Elvira NABIULLINA:

We have really mentioned and I can confirm now that we seek to make decisions at pivotal meetings. However, that does not rule out decision-making at other meetings. Why are pivotal meetings good for decision-making? At pivotal meetings we present our report to the market and analysts, update the forecast, and carry out an in-depth analysis of all factors behind our decision. Certainly, if the situation between pivotal meetings, as well as our estimates of inflation dynamics, inflation expectations, economic and labour market environment allows us to make a decision, we will take this opportunity.

Bloomberg, a news agency:

Two questions, if I may. First, has the Bank of Russia estimated the opportunities of lifting US sanctions on the back of Trump’s victory? Many analysts consider such developments to be more likely now than before. Second, when should we expect the first Bank of Russia bond issue?

Elvira NABIULLINA:

Neither of our forecasts (three of them – risk, baseline and higher oil price scenario) provides for lifted sanctions.

Second, as far as the Bank of Russia bond issue is concerned, we expect a shift to liquidity surplus and sustainable liquidity surplus in 2017. We are currently experiencing structural liquidity deficit and successfully handling temporary liquidity surplus with deposit auctions. We consider securities issue to be reasonable only if structural liquidity surplus is sustainable. However, certain amendments to the legislation are needed to make these securities more attractive. These amendments have been drafted and I hope they will be approved.

Interfax, a news agency:

How do you estimate the efficiency of banking sector support through federal loan bonds (OFZ) in terms of loan portfolio dynamics? When speaking to the Federal Assembly, the President mentioned that lending (even adjusted for FX revaluation) had not grown considerably. Some banks violate their obligations to build up lending; they prefer to pay a fine. Taking into account the amount of allocated funds, these are hardly big losses.

The second question will be about already mentioned supervision and management reshuffle. The day before the briefing, Olga Polyakova was promoted to the position of deputy governor. Which departments will she take charge of? Thank you.

Elvira NABIULLINA:

The first question touches upon the adopted programme of additional capitalisation of banks. Let me remind you that this programme and the decision were adopted in the hard period of late 2014. I believe that the programme had a positive effect. First, it had a positive psychological effect for the banking sector. It realised that it would not be left without capital, because as early as in the middle of the year, when the first decisions on additional capitalisation were taken, banks saw real effects. This process takes a long time as it implies corporate procedures, etc. However, banks realised that this source [of funds] is available. I believe that it played a positive role in shoring up lending in 2015. Lending could have dropped considerably without this programme.

This year has really seen a slight decrease in bank lending. Statistics vary across months showing a modest drop. It results primarily from banks’ tougher approach to borrowers, risk assessment and risk management. Given that banks have profits and can accumulate capital, we assume that they will increase lending next year and this lending will be absolutely sound. Importantly, it will be lending to effective projects in the economy and consumer lending which does not result in bubbles. Preserving stability of the banking sector and the financial sector as a whole is very important for us.

A few words about efficiency of banks which have received public financing. Let me remind you that the objectives set for them by the Government were not only to boost lending, but to boost lending to high-priority sectors, which included small enterprises, manufacturing, mortgage lending, etc.

The latest available statistics suggest that banks, which have received such capital, tend to meet these requirements. There are individual violations we have to handle, but overall lending to these high-priority industries and sectors has increased by roughly 8.6% since the programme was launched. Such lending growth to these sectors is twofold higher than that registered in banks which did not receive support.

Therefore, I do see positive effects of supporting lending to high-priority sectors. Let me repeat that the most vulnerable sectors are small and medium-sized enterprises, etc. Certainly, this project needs monitoring and efficient decision-making with regards to non-compliant banks. However, I believe that the programme proved to be efficient enough to support the banking system and lending in this difficult period.

As for management reshuffle, Olga Polyakova has been appointed a new deputy governor of the Bank of Russia. This HR issue is closely connected with organisational changes in the Bank of Russia.

As you may know, we are trying to improve banking supervision to render it more active and capable of revealing problems in the banking sector at their early stages. That’s why we are going through considerable internal reshuffles. Today’s decision, so to say, completes this internal programme. So, what does it mean? It means centralised supervision. We have decided to establish a separate Ongoing Banking Supervision Department. It means that ongoing banking supervision is to move from the regional branches to the head office. Ms Polyakova will be in charge of this department, as well as the Systemically Important Banks Supervision Department. The head office is already engaged in ongoing supervision. Supervision of major banks by the head office proved to be positive experience, and we are applying this pattern to the overall supervision. Certainly, we will have regional representatives, but they will report to the Ongoing Banking Supervision Department. We already have the Banking Supervision Department that will preserve its functions. It will also be supervised by Olga Polyakova.

At the same time, as you know, we have other new initiatives aimed at improving the efficiency of supervision. We are going to establish a Risk Assessment Service, a new resolution mechanism. Another proposed improvement is integration of off-site supervisions with on-site inspections. Vasily Pozdyshev will be in charge of off-site supervision and inspections, establishing and developing the Risk Assessment Service, creating a new resolution mechanism, and banking regulation. Dmitry Tulin will supervise banking regulation and banking supervision.

These changes are introduced under business process reengineering. We have analysed our business processes and their drawbacks, and now we are applying a systemic approach to developing new business processes. We hope that it will allow us to improve the quality of the Bank of Russia’s supervision.

Interfax, a news agency:

You mean there will be two departments…

Elvira NABIULLINA:

Yes, for ongoing supervision, a front-office that will take the functions of our territorial branches, and the Banking Supervision Department will remain as it is.

TASS, a news agency:

Good afternoon, Ms Nabiullina! TASS, a news agency, Nikita Zharkov. Does the Bank of Russia expect considerable ruble appreciation that would threaten financial stability on the back of the OPEC deal to cut oil production? Thank you.

Elvira NABIULLINA:

No, we do not expect the ruble to appreciate to the extent that it would threaten financial stability.

RIA Novosti, a news agency:

Ms Nabiullina, the New Year is coming, and everybody is looking at the results. Which currency would you advise Russians for their savings? Thanks you.

Elvira NABIULLINA:

What do you expect me to advise? Definitely, the ruble. Inflation is going down and will continue the downward path. Inflation will not depreciate ruble savings and the current interest rates are above the inflation rate, they are positive.

RIA Novosti, a news agency:

Can you advise to deposit money with banks? Which ones?

Elvira NABIULLINA:

Let me repeat, we do not comment on operational banks and do not advise on depositing.

Izvestia, a newspaper:

Ms Nabiullina, do the Central Bank and the DIA have an agreed upon or drafted schedule of the agency’s debt repayment to the regulator? There is information that the debt is already approximating 0.5 trillion rubles. Thank you.

Elvira NABIULLINA:

We issue loans with fixed maturities and consider them to be timely redeemed. It is clear that the DIA may borrow from the Bank of Russia if it is short of funds for a new case. It is stipulated by the law. I cannot recall the latest calculations, but as for the already issued loans, if we assume that there are no new bank resolutions and the banking sector ensures payments in line with the rates, it will take the DIA about four years to clear off its debt. This is not a long period.

Bloomberg, a news agency:

Two questions again, if I may. Is the Bank of Russia still encouraged to steer the ruble exchange rate because some Government officials disagree with floating exchange rate?

The second question. Has the internal investigation on the case of Vneshprombank been completed? Who has been found guilty? Thank you.

Elvira NABIULLINA:

As far as the floating exchange rate is concerned, some experts really believe that we should steer the exchange rate. However, to do that we must take certain measures which are rarely mentioned. These are either spending the international reserves, or imposing foreign exchange restrictions or capital controls.

We believe that the floating exchange rate is beneficial for our economy. Given that our export – monoexport – structure is subject to external shocks, this exchange rate ensures better adaptation of the economy, and it is clear to us. Meanwhile, the economy is adjusting better than we have expected. I have already mentioned that this year drop in GDP was smaller than forecast at the given prices. I mean this drop corresponds to lower prices. Therefore, we can see a considerable adaptability of the economy. The commonly worrying feature of the floating exchange rate is its volatility. We are perfectly aware that both businesses and households are concerned about considerable fluctuations of the floating exchange rate. However, we already see that the exchange rate has become less volatile than oil prices it used to follow. Elasticity was very high in certain periods. We believe that this volatility will go down as the economy is diversified as needed. The more diversified the economy will be, the fewer possible fallouts from the floating exchange rate we will see.

In addition, hedging instruments are gaining in demand. They were hardly developed in Russia because of the managed exchange rate. Certain financial instruments allow individual market participants to hedge the risks businesses may encounter due to the exchange rate volatility.

As for investigations, we are really inspecting different cases now. In our view, any case – from licence revocation from a large bank to bank resolution – calls for an internal inspection of what was wrong and so on. However, we have come to a conclusion that we should reorganise the supervision itself, because the supervision we have had for years fails to solve and to see many problems. At the same time, even if we improve our internal operations and supervision we will still be unable to cope with fraud, criminality, forged reporting and creative accounting. Punishment shall be inevitable in these cases, because the Central Bank has no investigative functions allowing prompt response to the fraud and forgery. Unfortunately, in most cases of licence revocation such misdeeds are in place. Therefore, we try to apply various indirect indicators, but I regret to say that they are not always effective when we deal with creative accounting or something of that kind.

Vedomosti, a newspaper:

Let me return to the main topic of this press conference. Given that inflation is going down faster than forecast, that analysts and businesses have revised their expectations and forecast that inflation may go beyond expectations in 2017 and fall below 4%, the developments are in line with the Central Bank’s expectations. In this regard, can we expect a key rate cut at one of the three forthcoming meetings? Especially if you say that you mention the first six-month period just nominally. Or why it cannot be expected at one of the three forthcoming meetings?

Elvira NABIULLINA:

The situation called for prudence in revising the key rate throughout the past year. Our monetary policy stance provided for weighted decisions and early risk assessment.

Therefore, we are not going to give up this approach and will look at the developments when making our decisions.

Inflation expectations – including those of households – are really in decline. However, let me emphasise that unfortunately they are yet to reduce to the level compatible with the 4% inflation target. This decline is not enough for us to say that inflation expectations have been anchored and pose no risks. Year-end inflation really performs better than we forecast. However, it is essential to distinguish between the contribution of fundamental and temporary factors, because the latter are in place. Fundamental factors also made their contribution, but the temporary ones played a considerable role in inflation reduction.

Therefore we will be prudent in cutting the key rate. I do not rule out that the decision to cut the key rate can be taken at any meeting. However, we cannot be more precise, and therefore we prefer to speak about the first half of the year. Everything depends on future developments.

Thank you.

Speech by Bank of Russia Governor Elvira Nabiullina at the International Conference ‘Modern Auditing: Problems and Prospects’