Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 16 September 2022
Good afternoon! Today, we have made the decision to decrease the key rate by 50 basis points to 7.50% per annum.
With the key rate at this level, we can say that our monetary policy is currently neutral. We see that one-off disinflationary factors are gradually weakening and proinflationary risks are growing. We believe that we now have less room for reducing the key rate. According to our forecast, inflation will slow down to
I will now explain the reasons behind our today’s decision.
First. Annual inflation is slowing down, but the effect of disinflationary factors will be weakening further on.
The main contributors to the price adjustment in summer were the earlier ruble strengthening, households’ higher propensity to save, and the expanded supply of agricultural products. These are largely one-off factors, and their impact will gradually be diminishing. Current price growth rates will exceed today’s near-zero levels. That said, we do not rule out that annual inflation in the first six months of the next year might temporarily decrease below the target because of the high base effect. In other words, arithmetically, we can get a low rate comparing prices for consumer goods and services in March—April 2023 with prices in March—April 2022 when we observed soaring demand and the surge in prices. In this context, annual inflation will, like a rear-view mirror, reflect the situation of 2022.
In addition to the factors decelerating inflation that I have already mentioned today, the current weak inflationary pressure is associated with the effects of the structural transformation of the economy. Earlier, we said that it was primarily speeding up inflation. Now, we can see that the situation is more complex: the structural transformation might be accompanied with disinflationary processes alike. In particular, the effects of the sanctions on exports and imports might be both proinflationary and disinflationary and change the direction over time.
I would like to explain this in greater detail. Speaking of the sanctions on imports, their initial effect is certainly proinflationary as the economy faces a deficit of the sanctioned goods. However, later on, adjusting factors might arise. Firstly, there are alternative supply channels that are arranged, substituting products, and so on. Progressive restoration of imports smooths the proinflationary effect. Secondly, when sanctions are imposed on a considerable share of imports, the demand for foreign currency inside the country declines and the ruble strengthens, which also causes an adjustment of the initial surge in prices.
In the case of sanctions on exports, the original effect is, on the contrary, disinflationary. Exporters are looking for opportunities to make up for the lost external demand, including by expanding supplies to the domestic market, which puts downward pressure on prices. If sanctions result in a contraction of the inflow of export revenues to the country, this decline partially, through the ruble depreciation, weakens the initial disinflationary effect. Many companies will gradually find new external markets. This factor might both speed up (as companies become more flexible in their pricing policy in the domestic market) and slow down inflation: when the inflow of foreign currency revenues recovers, the exchange rate rises, which has a disinflationary effect.
Summing up, we believe that the structural transformation of the economy will be accompanied with a faster rise in prices, despite some short periods of their adjustment. This is a critical factor that we consider forecasting inflation above the target next year and choosing our monetary policy approach. We have decreased the inflation forecast for this year to
Making our decisions, we rely on the forecast, rather than current inflation trends. The estimate of steady inflationary pressure is of key importance over the forecast horizon. ‘Steady’ means that inflationary pressure is adjusted for seasonal factors and the contribution of the most volatile components distorting inflation trends. Today, this estimate is low, but it is still above zero. I mean median, core inflation and other indicators of inflation adjusted for volatile components.
Further on, steady inflationary pressure might intensify slightly. Among other things, this might be driven by a decrease in households’ propensity to save. Currently, people prefer to save, rather than consume. This is largely explained by high uncertainty, a decline in real incomes, and concerns about future incomes and employment. However, this is partially associated with the so-called forced saving. People could save for large purchases or travel, but were forced not to go ahead with them, as a result of which the unused funds remained in their bank accounts.
If inflation expectations stay elevated, this might shift this behaviour model towards more active consumption. We are concerned about the fact that households’ inflation expectations are still elevated and have even risen slightly, although the overall level of the prices has been decreasing for several months already. This was different over previous periods of inflation deceleration, for instance, in 2019. If the situation in the economy evolves better than expected and people feel more confident in their future incomes and employment, this might also boost consumer activity.
Second. The economic situation is better than expected.
The GDP decline in the second quarter was close to our forecast. Moreover, there are signs that the situation is changing in a slightly more positive way in the third quarter, although it is still very uneven across sectors and regions. The situation in coal production, metallurgy, and forestry is more complicated as the sanctions in these industries significantly hinder companies’ operations. Goods exports to the West have seriously contracted or even become impossible in some cases, whereas goods sale to the East requires a considerable expansion of infrastructure. This will take time.
Nonetheless, importers are adjusting to the changed situation wth greater agility. Importers of domestic appliances and electronics have managed to restore supplies by refocusing on other manufacturers and using parallel import channels. Construction companies have also been able to arrange the supplies of many items, and most agricultural enterprises have managed to find new seed suppliers. More details on these issues are available in our Regional Economy review.
I would briefly talk of the labour market. The situation here remains stable. In recent months, companies have been using part-time employment schemes slightly less frequently. The demand for labour remains steady, although its structure is changing. For instance, companies are importing new equipment, due to which they need specialists who have completed retraining to work on this equipment. The structural transformation of the economy will inevitably cause a dismissal of employees where production becomes economically irrational or a transfer of workforce to industries opening up new opportunities. This might translate into a temporary increase in structural unemployment.
We will factor in all these trends in our updated forecast that we will present in October. The forecast of GDP for this year will most probably improve.
Third. Monetary conditions are currently neutral overall, according to our assessment.
The structure of household savings with banks is adjusting to the earlier changes in monetary conditions. In spring, the yield curve of federal government bonds was inverted, that is, short-term interest rates were higher than long-term ones, whereas now the curve has normalised. Following this change, deposit rates have also adjusted, which has influenced the structure of household deposits. Specifically, the short-term deposits opened in spring at high interest rates have been transferred to current accounts and longer-term deposits. The structure of savings is thus returning to that observed last year.
Businesses’ and households’ demand for loans is increasing. After a pause in spring, corporate lending is expanding at a high pace. Although subsidised loans continue to play an essential role, market-based lending is becoming more important as it is getting more attractive owing to the considerable reduction of the key rate. Growth in retail lending is mostly driven by mortgage loans. Banks’ risk appetite is recovering, which is also confirmed by a higher percentage of approved applications for unsecured loans.
Overall, monetary conditions have neither a proinflationary nor a disinflationary effect at the moment.
I would now dwell on the risks for the forecast.
Disinflationary risks might manifest themselves predominantly in the short term. These risks might arise if the pass-through of the earlier ruble appreciation to prices becomes stronger, households’ propensity to save remains at the current level or increases, and exports are redirected to the domestic market.
As to the medium-term horizon, proinflationary risks still dominate. They include a contraction of foreign currency revenues due to the already announced sanctions. Geopolitical risks remain significant. A worsening of the situation in the world economy might have an additional negative impact.
Consumer activity is a factor of high uncertainty. Elevated inflation expectations are not transforming into a rise in consumer demand at the moment. However, this might change, especially in the situation when inflation expectations are high and unanchored. The scenario where people start to spend their savings faster and take unsecured loans more actively is possible as well.
There might arise additional supply-side problems. Today, we have not yet experienced all the consequences of the restrictions on investment goods imports as the service life of equipment is quite long. Over time, these problems might become more pronounced.
An essential issue for us is the budget. In recent months, budget expenditures have been growing very fast. This might also provoke proinflationary effects.
I would like to focus on the mutual influence of monetary and fiscal policies. A budget deficit, along with credit to the economy, is a channel of money creation. The more money the economy receives through the fiscal channel, the less room there is for a balanced growth of credit to the economy — that is, the growth rate that will not provoke excess inflationary pressure. To contain the expansion of this credit for ensuring low and steady inflation, we will have to set a higher key rate. A long-term shift in fiscal policy towards easing means that the Central Bank will need to maintain a higher level of interest rates to ensure price stability. Therefore, the size of the structural deficit of the budget will influence our assessment of the neutral rate of interest.
Now, I would like to comment on monetary policy prospects. Most likely, the key rate reduction cycle is now close to its end. There are multiple signs suggesting that inflationary pressure is ceasing to weaken. In this context, we believe it reasonable to preserve a neutral monetary policy stance. Considering that the inflation forecast for the next year exceeds the target, we estimate the range of the shorter-run neutral rate above the range of the longer-run neutral rate (which is
Thank you for attention.
Q&A for the Media
QUESTION from Interfax:
I would like to ask you to provide more clarification on the signal. You have said that the monetary easing cycle is now close to completion. Is there any room for a rate cut before the end of this year — for the Board to decide at its upcoming meetings? What are the chances of this cycle ending this year, or rather, does everything depend on certain external and domestic conditions? Additionally, you have improved the inflation forecast for this year. It is now
ELVIRA NABIULLINA:
As regards the future rate path, I have to say it again: we do indeed think there is less room for rate reduction at the present time. We will certainly look at the data, that is, certain movements cannot be ruled out, but generally speaking, there is less chance of a reduction moving forward.
Everything will depend on domestic and external factors, as you rightly say, which we will analyse. We are releasing an updated forecast in October, which will be built on incoming data, and we will make the rate decision based on these data and the forecast.
As for the
QUESTION from TASS:
A traditional question: Which options were on the table today, and was there any option of keeping the key rate unchanged?
And a second question to follow up: You have said that inflation may drop below target in the first half of next year. In which months might this occur? Could you elaborate?
ELVIRA NABIULLINA:
We considered three options: a 50 basis point reduction, a 25 basis point reduction, and the option of no change.
The decline in annual inflation, even below target, may be driven by base effects. Price growth accelerated between March and April 2022, so we may see annual inflation drop to its lowest in the spring months. Importantly, this is just an arithmetic effect, so in the end, we expect current paces to accelerate.
QUESTION from RIA Novosti:
I have several questions.
One is about the signal. I can see that the signal has been removed from the statement. Does this mean you do not intend to publish it at all from now on?
My second question is about the budget. You mentioned budgetary, fiscal spending, but how much would you say that the budget deficit would have to grow this year and next year to make the Bank of Russia begin monetary tightening?
And my third question is kind of personal. Are you going to wear a brooch again this year or early next year?
ELVIRA NABIULLINA:
We have not really omitted the signal. We have just removed the direction signal. In doing so, we reserve the option of giving more directional signals if necessary. Since we are indeed near the end of a reduction cycle, we assume that our next move may be an increase or no change in the rate. Although when we say that, we do not rule out a reduction. We are now really at a moment in time when everything depends on the external and domestic environments and on the way inflationary and disinflationary risks materialise.
With regard to fiscal spending, we do not provide estimates for the appropriate budget deficit. We do take fiscal policy into account in making monetary policy decisions.
In our view, the budget deficit would have to gradually decrease to avoid the need for a higher key rate, that is, so we can avoid a tighter monetary policy. We are well aware that budget deficits rise in crisis times. It becomes necessary to fund many items in anti-crisis response packages and restructuring programmes. Nevertheless, we expect the budget deficit to decline in the long term.
As for a brooch, for the time being, no — I do not see a reason for me to wear one.
Perhaps Mr Zabotkin can say something more about the budget.
ALEXEY ZABOTKIN:
Yes, just a short comment from me. The baseline forecast of July and the updated version we have prepared assume the same fiscal policy parameters that went into the draft Fiscal Policy Guidelines adopted by the Finance Ministry in June. Accordingly, if the draft budget before the Duma turns out to be substantially different from those parameters, it would be a significant factor to consider among others in setting the key rate path for the next year.
ELVIRA NABIULLINA:
Let me stress that the budget is indeed an important factor, but it is not the only one. We will make a decision based on the totality of the factors that have effects on the economy and inflation.
QUESTION from Kommersant:
There were no clear causes for the spike in inflation expectations in August—September. Although the Bank of Russia cannot, apparently, predict inflation expectations, what is your hypothesis as to what expectations are likely to emerge between October and December?
ELVIRA NABIULLINA:
First, let me say that in the summer months, our inflation expectations held in the
We refrain from making any hypotheses as to how they are to play out. There are indeed many factors that matter, which include the particular sensitivity to the exchange rate and expectations as to the exchange rate, and this sensitivity remains in place. The other factors will come under review in the context of inflation expectations data that come in on an almost monthly basis.
Mr Zabotkin, would you like to enlarge on this point?
ALEXEY ZABOTKIN:
Speaking of inflation expectations, it is not only household inflation expectations but also corporate price expectations that our surveys show to be in decline. We read this as a signal of the rather high uncertainty that both consumers and businesses feel about the economy, and that translates into increased inflation expectations. This is certainly a factor to consider in setting the nominal rate, given that consumer and business behaviour is in fact affected by the difference between our nominal rates and inflation expectations.
QUESTION from Reuters:
When foreign currency purchases are resumed, please tell us which purchasing options are possible in the near future. When will we have clarity about the fiscal rule, that is, which currencies will the Central Bank be buying, and in which volumes?
ELVIRA NABIULLINA:
Purchases of foreign currency are only possible if coordinated with the fiscal rule, on the condition that the fiscal rule provides for National Wealth Fund transactions in the forex market.
All the details of the fiscal rule fall within the Government’s competence, and it is currently under discussion. We hope that there is more clarity on the fiscal rule in the near future. From the standpoint of macroeconomic stability, we support the introduction of the fiscal rule.
Please go ahead, Mr Zabotkin.
ALEXEY ZABOTKIN:
As a reminder, the fiscal rule is not about currency purchases, but about currency purchases when oil and gas revenues are above the benchmark. The fiscal rule provides for sales of foreign currency when revenues drop below the benchmark.
QUESTION (Pravda Severa, an online publication):
Thank you for the opportunity to ask a question. This question might seem of only local importance, but it is very relevant to our region, Pomorye.
The region’s forestry industry is struggling to adjust to the change in the geography of the sales of its products. The change has triggered transportation problems, and the strengthening of the ruble has had rather negative implications for export revenues.
Can you say that the monetary policy of the Bank of Russia will help the industry operate under sanctions? The industry is very important for Arkhangelsk Region, and for other regions as well, primarily those with vast forest areas.
ELVIRA NABIULLINA:
In my statement today, I mentioned the challenging conditions the forestry sector has faced because it has been largely export-oriented and has relied on external demand, which has broken down. The example of this sector is a telling example of precisely why the economy needs restructuring. Some forest products will find new markets, but some will not. This case highlights the need for the transformation of the forestry industry as a whole by raising the timber conversion rate so that the products enjoy stronger demand in the domestic market.
We understand that such a structural transformation can only come with investment loans, that is, with long-term money at affordable interest rates, and that directly depends on inflation. The primary effect of sustainably low inflation is the availability of long-term lending. I have said on many occasions that the key rate has a direct impact on the cost of short-term money, whereas the cost of long-term money depends most of all on inflation.
This is why our monetary policy goal is to deliver a sustainably low level of inflation. We would then see more long-term investment loans being issued to an economy in the process of restructuring. However, for the time being, as long as the interest rates are high, the Government can step in and support industries through measures that may include capital grants and subsidies. It is up to the Government to decide which sectors should receive support and the amounts of such support.
QUESTION from the Life and Invest project:
I have a question about retail investors. This is really a hot-button topic. Time and again, we have stressed the need for the restoration of retail investor confidence, and people would like to know what has to be done to restore this confidence.
My second question is about the exchange rate. We have a floating exchange rate now. What are the chances of a switch to a targeted rate in the future? Is there any risk of the imposition of constraints on the free conversion of the currencies of unfriendly countries?
And my third question, if I may, is also related to retail investors. Starting in 2023, non-qualified investors will be unable to hold shares issued in unfriendly countries. But they will have the right to buy exchange-traded unit investment funds of Russian management companies that hold those foreign shares. What was the rationale for the Bank of Russia’s restriction? Why are exchange-traded unit investment funds available to non-qualified investors given that the infrastructure risks they bring are at least the same or even stronger?
ELVIRA NABIULLINA:
A lot of questions. Perhaps I will start with the exchange rate question.
We act on the premise that a floating exchange rate is better than a fixed one. Admittedly, discussions on this subject are ongoing. Let me once again explain the rationale, which I think is very important.
A floating rate enables the regulator to pursue an independent monetary policy. What is a fixed exchange rate? It is an exchange rate that relies on the economic policy, the sustainability of inflation, and the interest rates in the country issuing the currency to which the ruble, the national currency, would be pegged. Incidentally, we have recently seen inflation rise in the countries issuing reserve currencies.
In our case, it is the floating exchange rate that in many ways has stopped the growth of domestic market prices. A floating exchange rate helps the economy adjust more quickly to changing external conditions. There has been a drastic change in our external conditions. Certainly, the effect across industries has been mixed. The floating exchange rate helps deal with the mixed effects of the change in external conditions across industries. I would call it a common denominator.
Certainly, on the one hand, the price of this rapid adjustment is the increased exchange rate volatility that comes with a drastic change in external circumstances, and this is what we have experienced. On the other hand, it gives us the advantage of a steadier equilibrium, faster economic adjustment, and low inflation once the adjustment process is complete.
The fiscal rule is essential here, helping deliver better predictability and stability in the real exchange rate of the ruble. The fiscal rule that we have applied in recent years did indeed help us deliver more stability. Although indirect, its effects brought more stability to the real exchange rate.
Speaking of free conversion, I have to admit that the currencies we are accustomed to — reserve currencies such as the dollar and the euro — have become toxic, since many holders face an asset freeze. It appears that their issuing countries do not want us to use them widely. We can see that banks are working to reduce these risks, and these risks are largely behind all the fees we have discussed on many occasions.
But foreign currency will always be exchangeable for rubles. Such transactions will remain unconstrained.
As regards non-qualified investors and foreign securities, including mutual funds, they indeed have access to unit investment funds, but not to all of them — only to unit investment funds which are composed of no more than 40% complex instruments. What matters here is the structure of these unit investment funds.
Crucially, unit investment funds are run by professionals who manage risks, including what we call infrastructure risks: the risks of holding certain foreign securities. They must recognise such risks and make the best decisions for the benefit of their investors. They have fiduciary responsibility for breaches of these principles, which is to say that unit investment funds also assume this type of responsibility.
Unit investment funds are collective investments which help diversify risks, in contrast to investments in a single issuer's securities. Investing in one foreign company means taking on all the risk related to the company. Unit investment funds allow for more diversification of instruments. And thus, even if risks related to one type of security materialise, they can be offset by the positive performance of other instruments. That is the reason for our differential treatment.
QUESTION from RBC:
My question follows up on what Alexandra asked about investors.
Speaking at the Finance Ministry forum in Moscow, you said that the Deposit Insurance Agency was being considered as a potential platform to establish a fund from which to compensate some of investors’ funds.
Does the Central Bank have estimates as to the amount of frozen funds of non-residents we now have and what assets these funds could be invested in?
And my second question arises from yesterday’s events, that is, the sanctions. Has the Bank of Russia seen a steep decline in the acceptance of Mir cards, in particular, in Turkey? Have you been in dialogue with the Turkish regulator and other national regulators about this problem?
ELVIRA NABIULLINA:
The idea of setting up a compensation fund based on the Deposit Insurance Agency is under discussion, but we have yet to work out many issues and details. This and other proposals we are ready to discuss are intended to restore investor confidence in the retail market, and some questions have been asked about that. A freeze on securities will doubtless trigger a loss in confidence. We have looked into the use of the funds in
As to which areas of investment to pick, we have a wide range of options. Investing these funds will bring income. This income, although predicated on the state of the financial market, is a tool that can be used. Let me tell you once again: discussions are still ongoing at this stage, so we will be discussing the best way forward with our colleagues from the ministries and departments and with market players and investor representatives.
Regarding Mir cards, we are working with many regulators, many countries, to expand their geography. In this, we are confronted with difficulties (and you have rightly mentioned Turkey), as the banks in these countries are seeking to minimise sanctions risks for themselves — the risks of secondary sanctions. Non-acceptance will occur, especially of cards issued by sanctioned banks, but we will carry on these every-day efforts in a consistent manner.
QUESTION from Funny Money Media Project:
To continue with the topic of investor confidence, the Central Bank must be aware of the outrage from domestic investors about the situation around Gazprom shares on the day before the board’s decision on interim dividends was made public. It is hard to imagine that investors will interpret this as anything other than insider actions.
What steps does the Bank of Russia intend to take to combat insider trading in the Russian market? That is my first question.
And I have another about possible changes in the ruble exchange rate by the end of the year, which could be driven by recovering imports and declining export revenues. What action is the Bank of Russia contemplating at a time when the exchange rate is weakening as a result of the change in the trade balance? Is the regulator considering the option of changing the current limits on currency withdrawals abroad for individuals? I am referring to the current limit of one million dollars a month.
And my third question is about cryptocurrencies. The Prime Minister requested that the relevant agencies work with each other and the Bank of Russia to reach common ground on cryptocurrencies by 19 December. What are the odds of the Bank of Russia softening its still unwavering position on the use of cryptocurrencies, to liberalise this industry more in Russia before the end of the year?
ELVIRA NABIULLINA:
On the first question, the measures related to suspected cases of insider trading on the exchange, we believe that the exchange price is probably one of the most transparent valuation tools, asset pricing tools, so confidence in pricing on the exchange is critical to investor confidence. There is much talk about investor confidence. Indeed, we face a pressing need to restore that confidence, and fair pricing on the exchange is a key component.
As the regulator, we identify intentional violations in pricing, which could be market manipulation or insider trading. We monitor the course of trading to identify such price anomalies. If an anomaly is detected, we set out to investigate its causes and conditions, and also to establish any signs of manipulation or signs of insider trading.
Once the signs have been flagged, a detailed probe starts. The progression of the probe takes some time and is undisclosed until the findings have been approved to ensure that the business reputation of those being investigated is unaffected. But if the fact of manipulation or insider trading is confirmed, we publish this information without fail.
In this matter, we act like most other regulators do in their countries. This effort has been ongoing for several years. Over the span of this activity, we have detected as many as 126 facts of manipulation and, if I remember right, six facts of misused insider information.
And yes, the first criminal sentence was passed on insider currency trading in early September (as a result of a long fact-finding and evidence collecting procedure). In this, we seek to identify all facts of manipulation and insider information in close interaction with law enforcement agencies, given that relevant law enforcement practice, which has yet to mature, has been accumulating. So this was the first time a criminal sentence was passed.
As far as the exchange rate is concerned, it is really under stronger influence of imports and exports and is less affected by movements in the financial account. A lot will depend on import and export trends given the numerous effects of external restrictions, and these are factored in when we make monetary policy decisions. Foreign trade is really a key factor which we watch very closely.
Now on to cryptocurrency. Our position is that we are open to a discussion about how to use digital financial assets, including cryptocurrencies, for cross-border settlements, but we are still against the use of cryptocurrencies as a means of payment, as are we against their free domestic circulation. We are continuing our discussion of all these matters with the Government. As we see it, central bank digital currencies have great potential as a means of cross-border settlements.
Speaking of digital financial assets, we have legislation on digital financial assets. Such digital financial assets should be issued in a simplified procedure in areas where they are not intended to be used as quasi-cash.
These are the core principles of our approach. We are still working out further details with the Government.
QUESTION (Yulia Kuznetsova, investment blogger):
Further on the subject of cryptocurrencies, the cryptoruble was unveiled at yesterday’s conference. Here is my question: what is the Central Bank’s vision for the further rollout of the digital ruble? Is this effort going to continue into 2023, and are we going to see the digital ruble in operation? That is my first question.
My second question is about our national foreign currency reserves that are now frozen. Does the Bank of Russia have a plan to return them all to the country?
And question three, please, about retail investor confidence and investment advisers. Moving forward, what are the chances of investment advisers dealing with retail investors, and how promising is the career of an investment adviser? For example, an investment adviser might give recommendations to a retail investor — a non-qualified investor — regarding the purchase of a security which only qualified investors are allowed to buy.
ELVIRA NABIULLINA:
We are making every effort to deliver on the digital ruble project, a project with major implications for the development of the financial system and for settlements.
We have begun the testing of the digital ruble with 15 banks, but it is still in test mode, with the objective being to understand how wallets are opened on the digital ruble platform and how transfers between consumers and payments for goods and services are made, including through QR codes. Real customer-initiated transactions are due to start on 1 April 2023 (though still in test mode), in limited volumes, which are expected to grow gradually.
The project involves a lot of technological issues. It is imperative that this new form of the ruble has credibility and that all cybersecurity issues are resolved for the initiative to develop into a seamless and user-friendly solution.
As regards foreign currency reserves, we are taking the case to court, but it is a very long process. We are working out this issue to find the best approach.
Speaking of investment advisers, they are indeed valuable participants in the financial market, and they can help build investor confidence. On to your question, the case of an investment adviser making a recommendation, and whether we should authorise non-qualified investors to buy securities that are open only to qualified investors. We approach this with discretion, because an investment adviser might make a recommendation, but the risk ultimately falls on the client. The transaction might not immediately follow the recommendation. Things may change in the meantime, and the client, unable to assess these risks themselves, may assume them and sustain losses.
In addition, further regulatory changes are needed in our opinion, to expand the powers (including opportunities) of investment advisers and to make their framework of responsibility clearer, because more clarity is needed in the area of fiduciary responsibility. For example, there are no requirements for investment advisers’ own funds. And even if a losing client, a non-qualified investor, should prove that the loss was the result of an adviser's recommendation, there would be no way to recover the loss.
Also, the development of the investment adviser profession should involve the further delineation of responsibility. I know from my colleagues who are knowledgeable about investment adviser services that many investment advisers offer training programmes, and that is a good thing. But the text that says that investment advisers are registered with the Bank of Russia is usually typed in capital letters, while the text saying that investment advisers are not responsible for their recommendations is in the fine print. That is why we need to put things into alignment.
QUESTION (Abakan.ru, online news outlet):
Household deposits are increasingly losing appeal because of the key rate reduction, but non-qualified investors have no investment options on the exchange. The internet abounds with sham brokers and pyramid schemes of all kinds. They operate thanks to low financial literacy. What investment options are there for households?
ELVIRA NABIULLINA:
Yes, this has become a regular question. What are the investment options? Unfortunately, there is no universal solution for everyone. It all depends on the situation, the income, and the volume of funds accumulated for investment.
Risk appetites differ. Goals and admissible risks are certainly very individual in nature. Bank deposits are the most conservative and probably the most popular money saving instrument. Deposit rates tend to be only a little above inflation, but deposits come with an insurance system which rules out the risk of loss of savings of a certain amount (it is now 1.4 million rubles).
There are different investment options depending on whether you are a qualified or a non-qualified investor. But most Russian instruments on the stock exchange are available to non-qualified investors.
Our companies, many large companies, are issuing market offers. And the restrictions we impose are intended to protect non-qualified investors against the risks that stock market instruments carry. That is how they are different from deposits, for which a certain amount is fully insured. When investors buy foreign securities, they must understand that they are assuming the risk of a foreign jurisdiction and that they would have to turn to a foreign court if anything went wrong with such securities. There is no way the regulator could protect them. People should therefore make their decisions in recognition of this risk.
Investors who can assess these risks are considered qualified and have access to a wider set of tools.
As for the pyramid schemes you mentioned, I do indeed have to admit that fraud is unfortunately rife in the financial market. We fight it in many ways. We detect financial pyramid schemes and illegal market players which take household funds, and we cooperate with law enforcement agencies. We will support the new legislation the Federation Council has developed. Under this legislation, household funds can be accepted only by legal entities with a certain status, such that the illegitimate acceptance of deposits can be stopped right away, before the fraudulent nature of the scheme is confirmed. ‘Right away’ is the key point.
QUESTION from PRO.FINANCY:
This is essentially a question from my readers. Mortgage rates — including preferential rates — have dropped to 3%, but they are only for benefit-entitled borrowers. These rates have become possible thanks to the Government's support measures. Given the 4% inflation target for 2024 and your inflation forecast, what are the chances of interest rates around 3% becoming available to general consumers?
ELVIRA NABIULLINA:
Such preferential rates are possible only in preferential loan programmes. A market mortgage rate cannot be lower than the rates on long-term OFZs — which is the rate at which the state borrows — because they are the least risky investment for banks. That is why mortgage rates must be higher than OFZ rates if they are not subsidised. With 4% inflation, a mortgage rate cannot be lower than the long-term OFZ rate, that is, it cannot be lower than 6%.
A subsidised rate may be local, as in the Far East, or it can be available as a temporary anti-crisis measure. There are very low or near-zero mortgage rates now being offered by developers. This is nothing but a marketing ploy. It comes down to the borrower buying an overpriced apartment, and it is out of this premium that the developer pays a lump-sum payment to the bank.
This is misrepresentation, and we intend to counter the practice. But generally speaking, mortgages are more affordable thanks to declining and sustainable inflation. We have already seen that mortgage lending has been increasingly more affordable to all borrowers even without subsidised loans thanks to sustainable low inflation. Mr Zabotkin, would you like to expand on this point?
ALEXEY ZABOTKIN:
Just a little comment to put things into context. It was reported yesterday that US mortgage rates on
For reference, our mortgage rates are usually
QUESTION from Bloomberg:
This is my first question. How did the Nord Stream shutdown affect the estimates for growth in the balance of payments for this year and next year? When you update the forecasts in October, will the current status of supply be priced in?
And a second question, please. The Bank of Russia is about to allow branches of foreign banks into Russia. What stage of planning is this initiative at? How does the Bank of Russia plan to regulate such branches? Will they be authorised to accept household and corporate deposits? What are the implications for competition with local banks? Are there any banks interested in opening branches in Russia?
ELVIRA NABIULLINA:
With regard to gas supplies through Nord Stream, we do not make any quantitative estimates as to what the effects of changes in supply routes for our export commodities will be.
At the same time, we take into account the higher risks and all types of restrictions on Russian energy supplies.
That is why we are fairly conservative in our estimates of oil and gas revenue. Importantly, I mean oil and gas revenue as a function of price and volume. A higher price comes with less volume, and vice versa, and we do take this factor into account. The exchange rate is one of the key factors in the forecast.
Again, I emphasise that we are quite conservative in our baseline scenario. The projections will be updated in October based on the incoming data.
As regards the opening of foreign bank branches, the idea is at a very early stage of discussion, and so I am not really in a position to answer any specific questions.
We might ultimately authorise branches of foreign banks to operate, as we authorise insurance companies, in line with our WTO commitments. And if and when do, we should think over the regulation that applies to branches to prevent regulatory arbitrage. We will have to make clear what transactions the branches will be authorised to make.
Are there any banks interested in opening branches in Russia? Yes, several have asked us if it is possible to open branches in Russia.
QUESTION from Russia 24 TV channel:
My first question is about the federal budget. The Government says that it will be relatively difficult. From the Bank of Russia’s point of view, what are the sore points?
And one more question, if I may. This year marks a quarter of a century that the mortgage market has been in operation. What do you think about the availability of mortgage loans, and about market transparency and security?
ELVIRA NABIULLINA:
As for the budget, it is indeed difficult to sustain macroeconomic stability in the face of fiscal spending on a structural transformation of the economy. We need to strike a balance.
The key issue, in our view, is not really a budget deficit in 2023. I reiterate that we understand that current conditions are causing a temporary budget deficit, and it will expand to finance the anti-crisis response and expenses in support of the structural economic transformation. But what matters here is how the budget deficit evolves, as well as fiscal policy normalisation.
Why does that matter? The level of the structural budget deficit has a direct bearing on our estimate for the long-term neutral key rate, the real neutral rate.
This may have been on the back burner in the past, because we had the fiscal rule bringing us stability. That is why it is very important to understand what kind of fiscal rule we will have, how we will transition to it, and what the long-term structural deficit will be. That will define the long-term neutral rate and, accordingly, the key rate path.
Now, regarding mortgage lending. I remember the early stages of discussions about the mortgage mechanism, when there was much talk that mortgages would not work in Russia. But the demand is high. A mortgage really is a very good way for people to solve their problems. No doubt, mortgage affordability is crucial, and this can only be possible if inflation is low. When inflation is low, long-term rates are increasingly more stable, and a mortgage is a long-term loan.
We have to watch the mortgage sector very closely to counter any conditions for, God forbid, the mortgage crises that many countries have endured. Any potential bubbles must be prevented, and we are monitoring the situation and working to ensure that they do not happen. We have a toolkit to apply to banks — — macroprudential policies — which limit the issuance of bank mortgages to highly indebted borrowers who cannot sustainably service their debt.
So the market is set to grow, but it is very important to ensure that it grows in a balanced way without either systemic risks or risks to borrowers who may have overextended themselves.
We are watching trends in the segment very closely. And, as I have said, we are particularly concerned about product marketing that misleads borrowers.
Ultimately, it stands to reason that the overall impact of the mortgage market has been positive.
QUESTION (Svetlana Negmatulina, blogger, Yuzhno-Sakhalinsk):
The number of Russians at risk of becoming unemployed is growing. This is abundantly clear, and the President has spoken about it. The latest official data show that almost 234,000 employees have been laid off or are on enforced leave. Is the banking system protected against the growing and inevitable payment delays? What are the odds that banks impose fines on people who have lost their regular incomes?
ELVIRA NABIULLINA:
The labour market is quite steady at this time, but we must surely recognise the many types of risk. Banks also recognise them. They make loss provisions for each loan they issue, including loans to households. We monitor the level of these provisions so the bank does not lose capital in a complicated situation and rely on provisions to continue lending.
Second point. The last two crises showed that banks are now much more disposed to loan restructuring. Banks tend to offer payment holidays when it is clear to them that people are laid off only temporarily and have every intention of finding new jobs.
First, some payment holidays are statutory and, second, a great number of payment holidays are initiated by banks on the understanding that it is best for both the borrower and the position of the bank if loan restructuring is possible.
Also, as with mortgage loans, there is consumer lending regulation that limits the issuance of bank loans to highly indebted consumers. Banks have estimates of borrower incomes.
Banks have learned to manage risks, they enjoy an adequate margin of safety in this sense, and so we do not foresee any fallout from potential adverse developments.
QUESTION from Frank Media:
I would like to revisit the issue of frozen assets and the compensation fund which may be set up at the cost of income from
It is my understanding that these funds must be treated as assets under management so that they can bring income. To put it simply, these funds need to be withdrawn. Who will be withdrawing these funds, on what terms, and on what grounds?
As I understand it, there will now need to be a legislative framework developed or changes made to regulations. At this moment, non-residents can still use the rubles in their
One more point, as I understand you, the investment options include, beyond bank deposits, certain stock exchange instruments. Do you fear that non-residents might take offence and increase the sanctions pressure?
Is my understanding correct that the compensation fund is for investors to receive money in exchange for part of their blocked assets? Or will they be reimbursed in excess of the blocked amount?
Another point, as you have mentioned, there are other ideas in the market about how to help investors. One such idea is a possible asset exchange between foreign and Russian investors. Some have proposed that this be done using the ‘all for all’ principle, while others have proposed offsetting certain instruments. Please give us your take on the idea. And can you confirm that you think the idea you have formulated is more feasible? Or am I wrong?
And one more question to follow up on the blocked assets and hopes: If VTB should miraculously reach a deal with the European regulator and get approval for an asset exchange with Raiffeisen Bank, would the central bank — as the regulator and a member of the legal committee — give its approval for the deal?
ELVIRA NABIULLINA:
On the latter issue, I can tell you right away that we do not comment on specific transactions between financial market participants.
As for the compensation funds, the withdrawal of investor funds is out of the question.
I emphasise that it is all about the income from investing these funds. As it stands, the funds of residents of unfriendly countries are frozen, but they may be invested, and that will bring income. That income will not accrue to the investors and may be used to compensate part of the lost income of our investors who have had their assets frozen. With their assets frozen, they are also not receiving income.
Therefore, withdrawal is not on the agenda. Certainly, you are absolutely right that a regulatory framework is needed for such a mechanism to operate. It will have to be discussed.
It is about the funds accumulated in non-residents’ accounts, as we have said. It seems to me that this does not affect the existing right to buy OFZs, given that we are not talking about withdrawing these funds.
What is there to invest in? These funds are invested now, but they remain in the banking system. Our position is that they need to be used to make payments to investors, mass investors most of all. This is because the income
The option of an asset exchange should also be discussed. While we do not discard it, all the pros and cons should be weighed. But as regards the exchange of these assets for the frozen funds sitting in
As regards the idea of a compensation fund on the basis of the Deposit Insurance Agency, there are mass investors there, with small amounts to be released.
We are now discussing mechanisms of all kinds for how things will be, whether payment entitlements will be purchased or issued via other methods. The details are in the works. We are interested in an open discussion of multiple mechanisms with investors to help our investors who find themselves in this situation, and we intend to exercise all options for that.
QUESTION (‘I Won’t Be Fooled!’ Zen Channel, Nizhny Novgorod):
In August, Russians received more than one trillion rubles worth of loans. Does that suggest that households are now overindebted? Is the expansion in household lending going to help the national economy, as some experts predict?
ELVIRA NABIULLINA:
First, consumer lending has just begun to recover after its decline in the spring, and we can see an acceleration in lending. However, its growth rates so far are moderate in our opinion and within the baseline forecast. Although one trillion rubles might sound like a big figure, it is the total amount of issued loans.
If we look into the effects of such lending on the economy, it is more appropriate to analyse the change in the portfolio of loans rather than the amount issued, that is, to account for loan repayments. And the money used to repay loans does not spur demand in the economy. We need to look at this delta. The loan portfolio as such was up 10% in August from July, but it was still only two-thirds of its amount in last August.
And yes, lending is recovering, but at a moderate pace. The lion's share of loans is mortgage debt. These are long-term loans with relatively low interest, and they are a very moderate burden on households in terms of monthly payments. I have mentioned the regulatory toolkit we have. It is making a difference by putting constraints on new loans to overindebted consumers.
And as for the help [to the economy], how consumer loans help the economy, this impact needs to be assessed in terms of monetary policy and monetary conditions. It is good if loans grow together with the supply of goods, because that supports the economy.
But if the supply of goods cannot grow, including due to various constraints on imports and logistics, the result will only be rising prices.
That is why we factor this into our monetary policy decisions and look at the growth rate of lending and of monetary aggregates, analysing the correlation with output growth potential.
QUESTION from URA.RU Russian Information Agency:
Another question about the exchange rate, please. With the oil price having declined over the past few months, our budget revenues are shrinking, and the dollar is rising against the vast majority of global currencies. Put another way, the ruble, trading at around 60 to the dollar, is effectively strengthening against other global currencies.
Why is this the case? Do you think this is in the interests of the Russian economy?
ELVIRA NABIULLINA:
The interests of the Russian economy, as I have explained, are in a floating exchange rate, which reflects all trends in imports and exports. The exchange rate depends on the balance of payments. The exchange rate has recently been more or less stable after a sharp weakening and a subsequent strengthening. For all the slight volatility, it is stable overall. Mr Zabotkin, will you please comment on that?
ALEXEY ZABOTKIN:
To be very specific, the ruble hit its strongest mark in June. You may remember that its local maximum in June, at the end of the month, approached 50 to the dollar, and it is now holding close to 60 to the dollar, as you said. That is, we have seen a certain weakening, which correlates with the decline in oil prices since June.
However, there are other factors beyond the price of oil that affect the exchange rate, in particular, the volume of exports of oil and oil products, the prices and volumes of other commodity groups, as well as what plays out on the imports side.
Therefore, what we see is the result of all the components of the balance of trade on the exchange rate. As Governor Nabiullina has said, the exchange rate reflects current economic realities, and it is stronger. This is doubtless beneficial to consumers, who enjoy more affordable imports, and to businesses, who need to purchase imported equipment and offset the rise in import prices driven by costlier logistics.
That is why we consider a floating exchange rate to be an instrument to balance the interests of all economic agents, which are determined by their business models and needs.
QUESTION from Vedomosti:
I have a short question. We reckon that the due diligence process for Otkritie Bank is half completed. Can you tell us about the progress? Have you already got an approximate market value for the bank in mind?
ELVIRA NABIULLINA:
It is in the works. The due diligence process is set to be completed by
Thank you for your time.