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Elvira Nabiullina's speech at State Duma's plenary session on Bank of Russia's 2021 Annual Report

21 April 2022

Good morning, Mr Volodin

Good morning, dear colleagues

Today, I am presenting a report on Bank of Russia activities. I will certainly dwell upon not only the last year results, but probably more on the events of recent months. On the things we are doing to help the economy and people, to support the ability of our financial system to withstand unprecedented challenges.

Let me start with the words of gratitude to the deputies. Given your busy and tense schedule, this week, all the factions found time to meet with me and my colleagues to discuss both the results of work and further steps to minimise the effects of the sanctions and to support the economy in new settings. There was also a meeting of four committees.

I will start with describing the state of the economy after the pandemic up to the present moment. This is instrumental not only for assessing the situation, but also for understanding the basis for our work now.

Last year, the Russian economy finished its post-pandemic recovery. At the year-end, GDP was up 4.7% reaching its 13-year high since 2008. Unemployment dropped to a fresh low. Demand fully recovered, but the supply of goods and services was lagging behind because of the spillovers of the pandemic restrictions. This was not a typical Russian situation. We see that inflation has started to grow all over the world and in Russia as well. However, we tried to act smoothly so as not to disrupt the recovery momentum of the economy and, on the other hand, to prevent the escalation of inflation; and we also raised the key rate.

As a result, the growth of lending in Russia is expressed in two-digit numbers. Corporate lending grew by 12% (let me remind you that in the quiet, pre-Covid 2019, corporate lending was up 5.8%), and mortgage and retail lending grew by 30% and 20%, respectively, last year.

We managed to create the necessary safety cushion in the banking system. This was largely the result of our multi-year policy aimed at the rehabilitating and clearing the banking system.

Such quick recovery was bound to have certain, so to say, ‘growing pains’. We consistently fought them not to allow the formation of various bubbles. For example, the subsidised mortgage programme boosted not only the issue of new loans, but also had a side effect in the form of growing housing prices, which we have broadly discussed with you. As a result of our joint efforts with the Government, the parameters of this programme have been adjusted to make it more targeted and more socially focused and, at the same time, to prevent the escalation of housing prices because of the programme scale.

Side effects were noted in the explosive growth of retail lending. We understood that excessive loan debts posed risks not only to the banking system’s resilience, but primarily to the well-being of people, so we took necessary measures.

Last year, we consistently diversified our international reserves. It is crucial for our economy to have diversified reserves. Why? First, like other countries, we are subject to various external financial shocks and crises. Therefore, being a non-reserve currency country, we must be able to level off the domestic foreign exchange market in the face of such crisis. Our domestic FX market was mainly in US dollars and euro. Why? The reason is that the overwhelming portion of our exports and imports is traded in these currencies. Moreover, the liabilities of businesses, banks and the state, as well as bank deposits are also denominated in them. That is why the dollar and euro part of the reserves is needed to counter such financial threats. However, starting from 2014, our state has been subject to the sanctions pressure, so we have been consistently diversifying our reserves and building up the proportionate stocks of gold and yuan for many years.

From late 2013 through late 2021, the portion of US dollars in the reserves contracted almost fourfold, whereas the share of gold increased by a factor of 2.5 from 8.3% to 21.5%, and that of yuan — from 0% to 17%.

We were aware of all risks. That was why dedollarisation was the priority objective of our financial system. It could not be achieved either in one day or in one month; it called for consistent efforts. Over five years, we reduced the portion of foreign currency-denominated assets and liabilities, as well as bank liabilities by a factor of 1.5.

We saw in the coming 2022 without any considerable imbalances, with a large safety cushion for the financial system and macroeconomic stability. All this was behind our ability to withstand the acute phase of the crisis during the first months.

One needs a structural transformation of the economy to be able to meet the challenges. This structural transformation will definitely affect the financial sphere, which should be re-focused onto the tasks facing the economy.

I will now switch to the measures we have been implementing since late February up to the present day.

First. When Western countries introduced the main package of sanctions against Russia, the financial market faced an immediate volatility spike. Exchange rates dropped abruptly followed by the selling of stocks and bonds. People were agitated and withdrew money from banks. This posed direct threats to financial stability and, of course, inevitably led to a surge in inflation. To cope with this first shock, the Bank of Russia raised the key rate to 20% on 28 February. This measure worked well. There is a reversal from bank runs and emotional purchases of goods and services to returning funds back to deposits. By now, most earlier withdrawn funds have already been safely returned to banks. This measure also made it possible to rapidly stabilise the situation in the FX market and to deal with the surge in inflation as well.

We are well aware of the fact that the high rate makes lending less affordable. However, this is a temporary forced measure, specially designed for the acute phase of the crisis. It prevents a further escalation of inflation and long-term interest rates. The rates will decline following the decrease in the key rate and inflation slowdown. Moreover, the return of household funds to banks thanks to attractive deposit rates also means saving resources for banks to expand lending. Virtually in all the factions, I was asked whether it was necessary to increase the key rate in this way. I can only say that by omitting this phase of the anti-crisis response we would not have been able to move on to ensuring affordable credit.

As the situation in the financial market stabilised and the inflationary pressure calmed down, we started to reduce the key rate. We did it even without waiting for the next Board of Directors meeting by reducing the rate to 17%. We will continue to monitor the possibility of its further reduction at upcoming meetings.

Second. In times of a high key rate, subsidised lending programmes are definitely needed. The government has adopted a number of such programmes. The Bank of Russia in part has also expanded special subsidised SME lending facilities up to 675 billion rubles.

Third. We have introduced a wide range of regulatory easing measures for banks to enable further bank lending. What are these regulatory easing measures? They allow banks to continue lending amid fluctuating exchange rates and securities prices and even the declining quality of the credit portfolio. This was also a key element of our policy.

Fourth. It is time for me now to thank deputies for such a quick adoption of the new law on loan repayment holidays. It was important for the protection of people and small businesses. According to this law, over 31 thousand loans have already been restructured. The law on loan repayment holidays, by itself, encourages banks to develop their own programmes for restructuring these loans. Now that banks, acting on their initiative and not according to the law, anticipate their borrowers’ needs, there are 170 thousand restructured loans.

Fifth. Extreme volatility emerged and affected the stock market. In one day, on 25 February, the Moscow Exchange Index lost as much as 24%. In this situation, our task was to protect the rights of Russian investors who had invested in these securities. We stopped trading and closed almost all sections of on-exchange trading. Exchanges resumed operation very gradually, sorting out various obligations almost one by one. If we had not done this, we would have faced a series of bankruptcies and a domino effect. Today we can say that the market is functioning virtually as normal.

Sixth. The sanctions imposed on the financial market and the Bank of Russia limited our opportunities to conduct FX interventions. To protect our FX market we introduced controls over capital flows. We limited payments to residents from unfriendly countries, and also introduced a requirement on the mandatory sale of 80% of foreign currency earnings by exporters. There is no doubt about the effectiveness of such measures. However, we realise that they not only protect the perimeter of our market from the sanctions, but also complicate foreign economic activity. Now, our companies will have to look for new suppliers of imported goods, component parts, raw materials, and exporters — for new markets. For this reason, we are constantly adjusting FX restrictions. This issue was also discussed in the factions. We see that the situation is dynamic, that it is developing. That is why our main task is to focus our help on companies building logistic chains and entering new markets to sell their products.

Seventh. Now, a few words about the National Reinsurance Company. We set up this company back in 2015 amid previous sanctions to reinsure risks faced by our companies inside Russia when foreign reinsurers refuse to work with them. It is what we need for planes to fly and cargoes to be transported. It is exactly what the sanctions policy is trying to paralyse. We have just increased the capital of this company tenfold up to 750 billion rubles, so that it can accomplish these tasks.

Another very important component of our financial system is the payment infrastructure, the system of payments and settlements. This is, in essence, the economy’s blood circulatory system. We did everything possible during previous periods to ensure a smooth functioning of this system.

Our NSPK (National Payment Card System) processes all international payment card operations inside Russia. It continues to do this even after these cards left the Russian market. Inside this country, almost nothing has changed for Visa and Mastercard holders. Now, we have an opportunity to cut costs for individuals and businesses by introducing temporary restrictions for acquiring fees on socially important goods. The Faster Payments System (FPS) that we created and developed means cheap transfers both between individuals and between individuals and businesses, when making payments for goods and services. Yesterday, we extended for two years the zero fee for banks in the FPS for funds transfers between individuals. Businesses are also actively employing this system, with the number of transactions growing 6.5 times over six months.

As for Mir cards, they enable payments in Russia and in the countries with which we concluded agreements, and we are going to expand further our geographical presence.

The Bank of Russia financial messaging system is doubtlessly the Russian equivalent of SWIFT. Foreign participants who work with Russian banks and companies can now connect to this system.

Now, I would like to elaborate on the structural transformation of the Russian economy. It is the most important thing now. It has already started, and it is this structural transformation that will determine the situation in the economy over several next quarters.

What does the structural transformation of the economy mean? The structure of the economy comprises economic relations, sales markets, the geography of exports and imports, the volume of output determined by external and domestic demand, the portions of different industries in the economy, the degree of production localisation, the extent of involvement in international economic chains, labour force distribution by sector, demand for specialists of certain professions, technological levels of various production processes, and so on and so forth. Virtually all of these components are bound to change now.

Because of the sanctions, Russian consumers and manufacturers are losing access to import and export markets for finished products and components. Problems may occur even when manufacturing is highly localised and when the degree of import substitution is fairly high. For example, when there were disruptions in the supply of some components and parts, the share of which in final products may be small. For example, textile manufacturers have encountered difficulties in acquiring sewing accessories, the key suppliers of which were from the European Union. What are they? For example, buttons. They are manufactured in many places, but according to businesses and their estimates, it may take up to several months to find new partners and set up proper logistics. The same is true about the paper industry. All timber is of Russian origin, but the bleaching chemicals were imported. Manufacturers are now switching to alternative suppliers, while developing their own chemical agents. This takes time. The food industry uses domestic raw materials, while urgently searching a replacement for the foreign packaging they used to have. This also takes time.

Exporters have to look for new logistics: many ports are closed for Russian ships; there are restrictions for the operation of Russian carriers in the European Union. This problem may be associated with the underdeveloped infrastructure of new business areas in Russia, thereby preventing companies from rapidly building up their output. We need to create infrastructure, and we are definitely able to do it, but again, this will also take time.

Problems emerge in all sectors, both in large and small companies.

The tasks facing the financial sphere and the financial system shall be also re-focused specifically to support this structural transformation of our economy and enterprises. The most important thing now is to protect people, their incomes and jobs and, therefore, enable the fastest possible transformation of the economy. This is a general economic and financial task.

The pace of changes can only be guaranteed by business initiative.

Therefore, we are to give maximum opportunity to all business entities to show initiative. I view the Bank of Russia’s task to arrange the work of the financial system so that it meets the needs of business in this environment. Without doubt, we must protect people, their incomes and savings, make sure their real incomes increase and are not corroded by inflation or devalued. Therefore, we will definitely have to pursue a balanced monetary policy.

We work in close contact with the Government, discussing all programmes together, and we mean to continue to do so.

For lack of time, I have only touched upon the key measures. We have submitted lengthy reports and given answers to all your questions. Of course, I am ready to answer your questions now.