Elvira Nabiullina’s speech at joint meeting of State Duma dedicated committees on Monetary Policy Guidelines for 2023–2025

Good afternoon, dear colleagues

Today, I am presenting the Monetary Policy Guidelines for the next three years.

External conditions for the Russian economy have changed dramatically over the year. The unprecedented sanctions are altering the geography of imports and exports, and many previous external economic relations have been broken, which requires the establishment of new ones. The economy is undergoing a deep structural transformation. This transformation progresses differently across industries and companies, some of which are looking for new foreign sales markets, others — for alternative suppliers of raw materials, components and equipment. Some enterprises are rather refocusing on the domestic market, increasing the degree of processing for this and changing manufactured products. This is a very complicated and comprehensive process. Of course, our policy takes into account the progress of this process and its evolution across industries and regions. The regional aspect is critical. It is covered in detail in our reports Regional Economy that we release before each key rate meeting of the Board of Directors. This means, that making a monetary policy decision, we consider the developments in Russian regions. Furthermore, we also carry out a business survey that is quite representative as it covers 13,000 enterprises. This is one of the largest surveys, that is, we take a realistic view at the developments in the economy and the progress of its transformation. According to our estimates, this process will certainly take time. The transformation is taking place now and will continue next year and later on. Its pace and overall efficiency will depend on multiple factors.

Some of them are beyond our control. These are the situation in the world economy and, accordingly, the demand for Russian exports. If the world faces a crisis, although we hope that it will not, our journey will be more challenging. Besides, we can see that the sanction pressure is intensifying, seriously affecting our partners in other countries as well. The sanctions are very powerful, and we should not underestimate their impact on the Russian and world economies as it will be impossible to avoid their influence.

On the other hand, there are many things that are within our control. In the first place, it is necessary to create conditions enabling households and businesses to adapt and evolve in the new environment that is more aggressive in some aspects. Mr Aksakov was absolutely right saying that this is not just a matter of preserving stability, but also development, which is the priority. However, we strongly believe that the development is impossible without macroeconomic stability, low predictable inflation, and a predictable budget. These are actually the benchmarks guiding the economy both in the previous environment and today. I think that the events of February—March, just as of late September—October reminded all of us of the importance of macrostability.

Our monetary policy is aiming exactly to ensure that low inflation is a reliable benchmark for people and businesses helping them make plans, save, and invest even amid so drastic shifts in the external environment.

This year has posed great challenges for the Russian financial system. The blow of the sanctions in March was an unprecedented shock. However, we have accumulated sufficient experience of combating crises of various nature and we have been and are learning important lessons from previous crisis periods.

We believe that the most important lesson is the need to be very fast and agile, while sticking to the essential principles, the fundamentals of policy that have proven to be efficient. This is why, despite the hazardous combination of the factors, including the sanctions against the Central Bank’s reserves, we were able to withstand the hard spring months and stabilise the situation. We have remained committed to the inflation targeting regime and a floating exchange rate of the ruble.

As was proven by the events of the subsequent months, this really helped fairly quickly restore an equilibrium in the financial system, return household deposits to banks, and relaunch lending to the economy.

The Bank of Russia promptly and rather significantly raised the key rate — to 20% per annum. The fact that we did this immediately after it became clear how serious the crisis we faced is has made it possible to both moderate the surge in inflation that occurred in spring and mitigate financial stability risks. The outflow of cash from the financial system caused by these worries discontinued very quickly. Moreover, after our foreign currency reserves, which make a significant proportion, were blocked, we were unable to carry out interventions in order to smooth fluctuations, volatility in the foreign exchange market. In this context, we had to introduce a wide range of capital controls. As the situation stabilises, we are gradually easing these measures. Why are we doing so? This is done to make the conditions for external economic activity more comfortable. This is what Russian companies need to be able to expand their external economic activity with the countries wishing to develop relations with Russia.  However, currently, we do not see any reasons for a further easing of the foreign exchange restrictions.

Already by September, we returned the key rate to the level of 7.5%, which is even 1 pp lower than at the beginning of the year, 2 pp lower than in February, and only slightly higher than the average key rate in 2018–2019. The growth of lending to the economy, including in both the retail and corporate segments, sped up already in the third quarter, in response to the fast reduction in the key rate. Besides, the current level of the key rate takes into account the still elevated level of economic uncertainty, on the one hand. This uncertainty decreases both consumer and investment activity. On the other hand, we also factor in elevated inflation expectations that still exceed the level of 2018–2019, for instance.

Today, lending, especially in the corporate segment, is expanding at a rather good pace. This suggests that the structural transformation of the economy is really progressing: companies are using credit to adjust to the new conditions and replace external borrowings. Specifically, according to preliminary estimates, over the first 10 months of the year, the corporate loan portfolio expanded by 9.9%, which is slightly more than 9.7% recorded over the first 10 months last year.

Retail lending is also increasing, although its growth has slowed down notably as compared to the previous year due to the decline in consumer lending in spring and October. Over the first 10 months, the retail portfolio expanded by 6.7%. Mortgage lending rose by 12% over the first 9 months of the year, and this figure also takes into account very low rates recorded in March—April. I would like to remind you that the growth rate of mortgage lending in 2021 was very high, namely 21%. Nevertheless, the figure for the first 9 months is still good.  However, in October, the amount of disbursed mortgage loans dropped approximately by 20%, and we are closely monitoring these dynamics. The disbursements have decreased, but the portfolio is growing overall.

Although the banking system faced the first and most powerful blow, it has been able to withstand the shocks of this year and preserves its potential for lending and its safety cushion. Therefore, we expect lending trends to remain positive and banks to smoothly continue the implementation of the new programme as well, namely the important programme of loan repayment holidays for mobilised citizens and their families. We will be able to provide the first statistics on these loan repayment holidays as of the end of this month. We are carrying out monitoring and will provide the information on the amounts of such loan repayment holidays as of the end of each month. Of course, we also handle complaints from people if they apply to us and address their requests.

The escalation of geopolitical tensions over the last six weeks has also exacerbated anxiety in society and has certainly affected people’s financial standing. Until recently, there was again an outflow of funds from the banking system. Similar effects were also observed at the outbreak of the pandemic and, then, this spring. Nonetheless, as people begin to understand the situation better and their anxiety decreases, they start to return funds to banks. Over recent weeks, the dynamics of the transfer of funds from bank accounts to cash have come close to its normal seasonal trends. We are monitoring this very attentively as well.

Besides, just as during previous crisis periods, households are wary and prefer to save in such circumstances. Speaking of our issue concerning monetary policy, this has a disinflationary effect. However, over the medium-term horizon, proinflationary risks prevail, including due to the effects associated with the partial mobilisation. We believe that, now, the current level of the key rate, which is 7.5% per annum, adequately reflects the existing balance of both proinflationary and disinflationary risks for inflation.

According to our forecast, annual inflation will equal 12–13% as of the end of the year. As to the inflation rate next year and the pace of its return to the target of 4%, this will depend of a number of both external and internal factors. Their possible combinations are described in the forecast. This is why we presented several scenarios in our Monetary Policy Guidelines.

The main one is the so-called baseline scenario that assumes that the world economy will avoid new serious shocks. Of course, major central banks will continue to raise their policy rates in order to temper the rise in inflation that is unprecedentedly fast in many countries. There were certainly some cases, but that was actually several dozens of years ago, in the last century, so to say. This will slow down the growth of the world economy and accordingly, affect the demand for Russian commodities. However, our baseline scenario does not assume a large-scale recession in the world economy or a loss of control over the situation in global financial markets.

Indeed, the shock of this year is very large-scale, and it was impossible to prevent a decline in the economy in this environment. Nevertheless, the scale of this downfall is less significant than many predicted when the sanctions were imposed. We expect that the economy will contract by 3–3.5% as of the end of the year. According to our forecast, the decline will also continue next year. However, in the second half of next year, the economy will start to resume growth. In 2025, growth rates will stabilise at about 1.5–2.5%.

Inflation will also continue to slow down, equalling 5–7% as of the end of next year and returning to its 4% target further on. We are intentionally not seeking to bring inflation down to the target faster as the structural transformation of the economy requires an adjustment of relative prices in a broad range of goods and services. We can see how the structural transformation of the economy affects many enterprises.  This process will progress more easily if the overall level of prices rises slightly faster than in normal conditions.

The key rate will stay at such a level that would ensure a gradual decrease in inflation, but this means that it will slightly exceed the neutral range for a certain period. According to our estimate, which we might adjust further on, the neutral range of the key rate is 5–6%, and we expect to return to it in 2025.

The second scenario we presented is Fast Adaptation.

External conditions in this scenario are similar to those forecast in the baseline scenario. The difference is that it assumes a faster establishment of new external economic relations in the Russian economy. According to this scenario, Russian companies will manage to arrange imports more quickly and exporters will be able to ramp up export quantities owing to new routes for energy commodity delivery and a reduction in costs related to changes in the geography of supplies. Domestic demand is also expected to bounce back faster under this scenario.

This scenario thus assumes that inflation will return to the target as early as the end of 2023 (as the expansion of imports will largely alleviate constraints related to product supply), and our monetary policy will be more accommodative than under the baseline scenario.

The third one is the Global Crisis scenario.

It assumes that the increase in policy rates by major central banks will be insufficient to stop the rise in inflation in good time, that is, inflation will accelerate despite the increase in policy rates by these countries. As a result, their policy rates will be high and less predictable further on. This will be a drag on the growth of the world economy, push up debt servicing costs, and reduce the value of assets. Furthermore, risks to financial stability will rise.

Geopolitical tensions will intensify under this scenario, and there will be a fragmentation, regionalisation of the world economy. The sanctions against Russia will be toughened (we consider this scenario with tighter sanctions), and this will become another factor worsening the situation in the world economy, in turn.

Consequently, we might face a crisis, the scale of which might be comparable with that of the 2008–2009 crisis.

For Russia, this will also involve a decline in the demand for the main Russian exports, GDP will contract more significantly, inflation will be higher than next year as both the value and quantities of exports will decrease more quickly, which will weaken the ruble.

This shock scenario, although it is unlikely to materialise according to our estimates, will require an additional tightening of monetary policy as compared to the baseline scenario in order to mitigate the consequences of adverse external factors for the Russian economy and prevent inflation from spiralling out of control. Under this scenario, it will be possible to return inflation to the target as late as 2025.

Baseline scenario. Why do we say that this scenario is baseline? We consider it much more probable than the alternative scenarios. However, we believe that we need alternative scenarios in order to be prepared, if needed, to promptly refocus our monetary policy depending on actual developments. Indeed, over recent months, the situation and the balance of risks for the world economy have slightly shifted towards a tougher scenario of possible developments, if not towards a comprehensive global crisis. This is also obvious from the events happening globally.

However, this is not a reason for us to just wait and see how the situation will be evolving — to let the grass grow under our feet, so to say. To the contrary, we should take our best efforts to create the conditions promoting a fast structural transformation of the economy. This is the only adequate response to the worsening of global external conditions. Of course, we need a broad package of measures for this purpose, including reforms to improve business climate and government support for strategically important industries and small enterprises. In this regard, the Government is actively proposing its programme of support measures. I would like to speak about this in greater detail as there were questions about it at the working group’s meeting: these are measures to develop the financial market, and not only monetary policy.

Today, a really important task is to supply adequate financial resources to support the structural transformation of the economy. This is the key objective for the financial market now. The priority is to develop domestic sources of both long- and short-term financing. I will provide more details about how to develop the financial market in general and adjust its structure considering the needs of the economy in December when we will present the Russian Financial Market Development Programme for the next three years. We submit this document to the State Duma every year. I would like to say that we promptly prepared the report on the new challenges we can see for the financial system and the new measures that should be taken. We have received and discussed feedback from the market and will factor in all comments and suggestions in our strategic document to be presented in December.

At the moment, I would like to outline only a few main tasks.

We can see that changes in the structure of the economy, when such a transformation is happening, and generally high uncertainty make it more difficult for banks to understand the situation in their borrowers’ business. However, we are well aware that banks should help borrowers — both companies and households — to live through this period of adaptation. For banks to be able to satisfy the increased demand for credit, we plan to use regulatory incentives. Specifically, this is needed to redirect banks’ resources for lending to the industries that are critical for further development. We will reduce the regulatory burden on banks’ capital through regulatory decisions on lending for the projects ensuring technological sovereignty and the modernisation of the economy. Currently, the Government (we are working jointly) is developing the so-called taxonomy, that is, the criteria of such projects that banks will be able to rely on in order to access such regulatory incentives. This is an important yet insufficient measure. It is essential that these projects be supported by development institutes as well. We believe that development institutes should play a more significant role. In these conditions, the risks inherent in such projects should be shared by banks, enterprises themselves, and the Government. Hence, we consider that the role of state guarantees should increase. We have been long discussing with the banking sector as well that we need to return really irrevocable and unconditional state guarantees to the legislation that banks would be able to rely on.

Given that the economy needs long-term resources (as the structural transformation requires long-term rather than short-term resources), it is certainly impossible to reckon only on the banking sector. Banks are unable to and should not be the main source of long money, or, to put it more accurately, long-term financing.

It is essential to increase direct investment, and not only debt financing, the more so that a considerable part of enterprises are already indebted, as we know. Growth, driven solely by an increase in companies’ debt burden that they are unable to tolerate, will lead to a credit crisis.

Banks lend money, but they are unable to and should not act as investment funds. However, direct investment and really long-term financing are critical for us now. This is exactly how the capital market develops when risks are accepted by investors who invest their savings for a long period, rather than by banks that need to continuously maintain liquidity and repay deposits. I am referring to both debt financing in the form of bonds (we can see that this market has been rapidly evolving, and now it makes a considerable proportion in financing) when companies can raise borrowings, and equity financing through the sale of shares. Equity in the form of reinvestment of companies’ retained earnings or new equity offerings are certainly an important driver of business growth.

Hence, the development of the capital market and equity financing, which is underdeveloped in Russia, will be one of the priorities in the coming years. The expansion of demand and supply in the securities market is essential for this purpose.

As regards supply in the securities market, currently, businesses are still not very active in using this financing instrument. Analysing the Russian capital market, we can say that its participants are companies from a narrower range of industries than in the structure of Russian GDP, for instance. This means that many companies are simply not presented in the stock market. Moreover, those companies that are already offering their shares predominantly make public offerings of a rather small value of shares. On average, such shares only account for about 33% of total capitalisation. As to other countries, in most of them and, certainly, in emerging market economies, this value is definitely much higher. In other words, we need to take measures to increase both the number and value of various securities accessible to investors who now have quite limited options.

The range of instruments available in the Russian market should be enhanced alike. To this end, we put a particular focus on the development of digital financial assets. Yesterday, we released papers on decentralised finance and digital financial assets in order to discuss the prospects and risks for the Russian market. It is essential to comprehend both the risks this involves and the resulting benefits for us to progress in this more actively.

The other side of the development of the capital market is the demand for Russian securities. To generally ensure the demand for securities — and, technically, Russian households are ready to invest and have entered the capital market, which we have been observing in recent years and many even said that this was a boom of retail investors — it is crucial to restore private investors’ confidence so as to encourage them to continue investment after the shocks that the capital market has also faced this year. Hence, we are currently discussing very actively multiple options and measures that would help address the problem of the blocked assets for investors. On the other hand, it is essential to create long-term investment instruments that investors will trust.

We support the idea of launching the third type of individual investment accounts — this instrument will allow 10-year investments. This will certainly become an important resource for enterprises. It is critical to develop the area of trust management when individuals do not have to face the stock market alone, but transfer their investments for trust management to experts, professional financial intermediaries. It is also necessary to increase the role of institutional investors, including non-governmental pension funds. Overall, the role of individuals’ long-term savings in investment should be more important. We believe that this will be promoted by the system of guarantees for non-governmental pension funds, incentives created to encourage individuals’ long-term pension savings, and support of corporate voluntary savings systems.

I would like to address yet another aspect. When these shocks occurred, we closed access to a large volume of information about financial institutions. However, for the financial market to operate actively and for investors to be able to make investment decisions, we certainly need to resume the disclosure of information by financial and non-financial organisations, except for the data that increases their sensitivity to the sanctions. We are getting prepared for starting to provide more information that will enable investors to make decisions. Besides, we are currently working on the development of domestic financial and commodity indices that are required for conducting transactions and making investment decisions by a wide range of market participants.

As regards external economic activity, international payments and settlements are critical. This system is exactly the target of the sanctions. Of course, our partners are worried about secondary sanctions. We are establishing bilateral relations, seeking to reduce sanction risks for our partners. This is quite hard as there are multiple individual aspects in different countries, in each country, but this is not impossible. Digital currencies that we are developing in Russia and our partners are developing as well can also become a factor of debottlenecking. Nonetheless, the main way to settle the problems with foreign trade payments is to strengthen confidence in the ruble. We can see that when we switch to national currencies, partners focus on the stability of the ruble and believe that it is possible through low inflation. When payments and savings are made in rubles, the ruble should not depreciate. Therefore, the factor of low inflation becomes essential for ensuring foreign trade settlements in national currencies.

Winding up, I would like to say that we had sufficient resources and instruments as of the beginning of the year to withstand a large-scale crisis and have fairly quickly stabilised the situation, which has been possible largely owing to our multi-year policy. If we had not had a solid footing in the form of macrostability and a robust banking system, the magnitude of the problems could have been higher. Indeed, there are new tasks to be addressed — we should ensure not only stability, but also progressive growth of the Russian economy. I am very grateful to deputies for their trust and the deep understanding of our work by the heads and members of the dedicated committees during many years. I would like to thank you for your prompt decisions on amendments to the legislation this year as they enable us to act as efficiently as possible because many decisions are supported by the approval of relevant laws.

The Bank of Russia will continue to pursue a policy aimed at ensuring low inflation, the stability of financial infrastructure, and the robust functioning of the financial market. We will thus be contributing to the structural transformation of the economy and, further on, to the creation of conditions that will promote well-balanced and steady growth.

Thank you for your attention and I am certainly ready to answer your questions.