Elvira Nabiullina's speech at State Duma's plenary session on Bank of Russia 2022 Annual Report
Good afternoon, colleagues and Mr Volodin.
For a start, let me thank all of you, all the factions. I appreciate your effort that went into considering our annual report. This work was very intense and focused. Over the year, our economy has come a long way from the shock of sanctions to adjustment, recovery and development in new conditions. Our current policy is aimed at enabling sustainable growth in these new realities.
Let us look back. Last spring, our financial sector and the broader economy were hit with a barrage of sanctions leading to a steep drop in the ruble and huge volatility in the stock market. At the time, there was talk of a collapsing economy as a result of a looming meltdown expected to ruin the financial system and cripple the domestic economy. But all that never happened. In my opinion, there are many reasons why we pulled it off. Among the key reasons are, first, the high adaptability of our businesses and the market principles of our economy; second, the safety margin that banks had accumulated in previous years; and third, the prompt crisis response of the Government and the Bank of Russia. I would like to thank you State Duma deputies for your prompt attention to our draft bills, resulting in approval of all the necessary measures.
The Bank of Russia used inflation targeting as a key means of defence. As a reminder, we switched to this monetary policy regime in the midst of the 2014 crisis. It was a challenging and painful decision then with heated debate over this course of action and whether the timing was right. Yet, we can see now that the decision was right. Thanks to the well-tuned inflation targeting toolset and market confidence in it, we were able to calm the financial market and quickly pass the peak of price growth.
We raised the key rate to 20%. This move, alongside financial stability measures, capital controls and regulatory relaxations for the financial sector, was a quick remedy to stop the panic in the foreign exchange market.
The sharp increase in the key rate helped us shorten the acute phase of the crisis.
What warranted that quick and sweeping course of action? Confusion and anxiety force businesses and households to make impulsive decisions. A surge in inflation sends inflation expectations higher, and they remain high for many months. Consumers seek to escape future inflation by buying up goods and foreign currency, further pushing up inflation. This hurts the economy, and companies are beginning to hold back payments — since the money becomes cheaper overnight. Supply chains are disrupted. Where there is a huge surge in demand, product prices are rising, further spurring inflation. And spiralling inflation is quite difficult to stop thereafter. That is why our priority was to navigate that episode of high turbulence as quickly as possible.
Ultimately, annual inflation was back to normal in one year rather than in two and a half — the time it took after the 2014 crisis. And we were able to reduce the key rate to pre-crisis levels in the shorter timeframe of seven months, rather than in three years last time.
What worked here is both the speed and the big step — 20% — of the increase and, most important, the time-tested toolset of inflation targeting we relied on. Our course of action was drastically different from the wait-and-see policy of most other regulators who assumed that it would be only natural for accelerated inflation to decline in the post-epidemic era. We gave a well-timed response to the risk of spiralling inflation.
As some major economies show, failure to make the right decisions at the right time in the fight against inflation comes at a price. Monetary policy should be focused on the future and fully take into account the balance of future risks for price stability. We have kept the key rate at 7.5% since September. This comes when annual inflation was down to 3.5% in March and is poised to drop further in April. However, seasonally adjusted growth in prices is currently close to 4%. Inflation expectations of both households and businesses are higher than in
Those decisions also helped stabilise the foreign exchange market. The exchange rate of the ruble, after very strong fluctuations, returned to the range of previous years. Its current changes track export and import flows as well as financial transactions. We are committed to a floating exchange rate as an effective stabiliser for the national economy. This means interfering in the operation of the foreign exchange market is only possible and necessary when its state threatens financial stability, as was the case last spring.
Last spring, we also introduced tight currency controls, aiming to restore stability in the foreign exchange market given that our reserves were partially frozen, and also as a mirror-like response to sanctions.
Some of the restrictions were subsequently eased and rolled back. When discussions were held in factions, we were asked why. As we see it, that move was absolutely necessary to push aside the obstacles for our companies, given their need for a quick and drastic overhaul of foreign economic operations and international settlements. Otherwise, the restrictions would impede the build-up of their foreign economic activity. Some restrictions, especially counter-sanctions, remain in effect. At the present time, we see no need for any significant changes to them.
To drive through business transformation and expansion, corporate requirements for long-term financial resources are now even stronger than usual. It stands to reason. Let me stress that rates on long loans or long-term bonds do not so much depend on the current key rate, which does matter, but on whether banks, their depositors and their investors believe that we will keep inflation within the targeted range. The increase in the key rate helped us arrest growth in prices and inflation expectations, which propelled a decline in the cost of borrowing. Yields on OFZs, government bonds that exert direct influence over credit rates in the economy, were up in the spring even less than the key rate and turned downwards thereafter. Had we allowed inflation to accelerate, loans would be costlier for both the budget and the corporate sector.
Before I move on to discuss the development of individual sectors of the financial market, let me say a few words about the structural transformation of the economy.
This is the path ahead for our economy on the way to sustainable growth. Throughout the year, our efforts were focused on supporting this process. Low inflation and the available credit it brings, an efficient stock market, insurance, and long-term money to invest in domestic bonds and shares are all enablers of structural transformation.
A very important result of last year: this transformation is under way. As they are adjusting to changes, businesses are finding new suppliers and markets. Our monitoring (covering 14 thousand companies) shows, for example, that problems with the import of components and raw materials were reported by two thirds of companies in the spring, whereas there are only 12% such companies now. This suggests an unfolding adjustment process — which we must support and facilitate.
Now on to the banking sector.
Last spring, our banks faced a combination of adverse events as sanctions crippled external relationships, currency risk set in and individual clients in the domestic market began to withdraw money. This is the way people react to uncertainty: they keep cash at home.
We supported banks with large-scale regulatory relaxations, instituted a temporary freeze on foreign exchange revaluation and revaluation of securities, and authorised the use of so-called buffers. It was only possible because the banking sector was overall in a healthy state. That flexible approach to capital adequacy was possible since we knew that capital adequacy ratios would return to normal once the shock is over.
With deposit rates becoming attractive on the back of the high key rate, depositors were increasingly coming back to banks. By the end of the year, the banking system had even reported an inflow of funds (of both households and companies). That meant banks had retained trust. Deposits have been protecting savings from inflation. Banks have opted out of many relaxations by now. Importantly, there was no need for the capital top-up scheme that we had to provide to the banking sector in past crises. And most importantly, banks were able to carry on with their key lending function.
As long as the key rate was kept high for a very short time, lending continued uninterrupted. More so, corporate lending grew even faster than in the quiet days of 2021.
Loan rates trended down as soon as inflation and the key rate declined.
Credit resources will play a large role in economic development. It is now a priority to support and expand the banking system’s lending potential. This is what we discussed in almost all faction and committee meetings. For this purpose, we temporarily lifted capital buffer requirements, releasing up to 15 trillion rubles in banks’ further lending potential. Another 10 trillion roubles in this potential will be coming from our incentive-based regulation, currently in development.
In coordination with the Government, we have developed a so-called taxonomy, or criteria, for projects that may qualify as supporting import substitution and technological sovereignty. Banks will be able to offer better lending terms for such projects given the lower capital commitments of banks under such loans. We expect the new regulation to apply in the second half of this year.
Mortgage loans. Growth in mortgage lending was sustained but at a normal pace — unlike in 2021 when some overheating emerged.
Undoubtedly, the growth in mortgage came on the back of government support as government benefits covered almost half such loans. It is true that such programmes make an impact in a crisis as they support demand for housing and thus the construction industry. However, as we offer such benefits, we should not lose sight of the key objective. And the primary objective of mortgage lending is available housing. That is, the flat price — the amount of the loan — that people have to pay for many years should be reasonable and would not eat up their incomes in the future. Therefore, in my opinion, the focus of attention should be on current problems in the mortgage sector. Growth in high-risk mortgages is intolerable. To address this problem, we are already applying our regulatory tools. I will be ready to give detailed answers to any questions you might have. We have also discussed these issues in committee and faction meetings given that almost all the deputies had questions about mortgage lending.
Now on to settlements and payments.
Last year, with the onset of the first wave of sanctions, global payment systems left Russia, in a matter of days. Despite that, thanks to the mature payment infrastructure we had that handled all transactions even on international cards domestically, all card transactions continued uninterrupted. Therefore, our citizens continued to enjoy essentially the same level of service domestically.
As you are aware, some banks were cut off from SWIFT, and we had been working for years to create a domestic alternative to SWIFT. This is where our Financial Messaging System came in to pick up the domestic flow formerly processed by SWIFT.
One of the key and most difficult tasks on hand is cross-border settlements and payments. For them, we need to set channels that sanctions cannot block. We are in intense bilateral talks with partner countries.
Digital ruble. We have planned a pilot project, and we want it to launch as soon as possible. The pilot project would be about real transactions and real money, but in small amounts and with a limited number of clients. We will then analyse the performance and will be able to offer the digital ruble to more people.
We consider the digital ruble as another means for payments and settlements, not as a means for savings. No interest is paid on digital rubles and no loans will be issued in them, whereas transfers in digital rubles will be absolutely free for consumers. We are now planning on about 300 thousand rubles a month as the amount to top up the digital wallet (this already takes us past the pilot project). This total amount alongside other balances in the wallet, for example, when digital rubles come from someone else, may be transferred to yourself or another person without interest. This is three times the amount in the Fast Payment System, which has gained traction in recent years.
The next most important topic is consumer protection.
Banks and other financial intermediaries are overall becoming increasingly client-focused. Yet, this is not a result of their voluntary action. What made the difference is the tightening of conduct supervision and continuous monitoring of banks and their relationships with consumers. We introduced special documents — key information documents — that established a clear standard for banks to inform their clients of all product specifics including payments and the risks involved. A cooling-off period was also introduced to let people think and opt out of unnecessary services or uneconomic products. And yet we see the emergence of new creative practices, and that makes us tighten supervision. These instances are not mass violations. Let us consider, for example, the case of a bank offering a seemingly low loan rate on that however comes with multiple fees and insurance policies. The bank robs the customer but technically speaking it acts in a relatively fair way.
We intend to stamp out such practices for they undermine confidence in the financial system. Here, let me thank you deputies for your help us in this matter, including the authorities the Bank of Russia was granted last year. We now have the right to enforce buybacks where financial products involved unnecessary or tied options and to suspend their sales.
Another significant problem is social engineering, which has been on our agenda for several years.
To fight this evil, we need coordination of our efforts with law enforcement agencies, banks, and telecom operators. We have systems that rapidly block fraudulent numbers and sites. This is where interaction with the Prosecutor General’s Office was critical. Over the past year, we have ramped up these efforts thanks to the legal authorities we were granted by force of new legislation.
Unfortunately, we have to report an increasing number of attacks, but the number of successful attacks is in decline. These efforts need to continue, and we believe that more responsibility should reside with banks and the setup of their fraud controls. Today, the consequences of social engineering are left for people to deal with.
The last thing I would like to speak on is bills of top priority. These are just several of all the bills we initiate but those critical to further development of the financial market, which is why I am highlighting them.
The first one is about a new procedure for calculating the effective interest rate whereby all fees and insurance must be included. This procedure has yet to appear. Some of the fees are indeed included, but borrowers still lack the understanding of how much they pay for a loan. This is crucial to the fight against tied selling and implicitly high interest rates. The latter case is when low rates are advertised but in reality they are too high. The bill is ready for a second reading. Admittedly, there is heated debate over this legislation and banks dislike it, but it would be indispensable to consumers. We ask you to pass it in a short timeframe.
The second bill is about fraud control. As we see it, a bank must compensate for losses if it makes a transfer to a knowingly fraudster’s account (one that is on the Bank of Russia’s list of suspicious accounts based on information exchange). If the bank has transferred money there, it is obliged to compensate.
This a truly important law given that consumer protection in the financial market is a top priority akin to stability of financial institutions — since this is about the life of our people. We see that technological advances come with new fraudulent activities. Hence this work stream where we need your assistance. We need to turn the tide and create an environment where consumers are confident in dealing with financial institutions and using their services.
There are another two bills we ask you to consider on short order.
First, the digital ruble bill I have mentioned. We are looking forward to its passing to start the pilot project. We believe that the digital ruble — a voluntary use of the new form of payments and settlements — will bring consumer benefits and lay the groundwork for more effective international settlements. Incidentally, we have been working on this subject with our partner countries.
The second one is about cryptocurrencies, and the State Duma has discussed it on multiple occasions. The issue proved really controversial. You are aware of our position: in new conditions, the limited use of cryptocurrencies for external settlements is indeed possible and feasible. We have problems with external settlements, and we have been in contact with foreign regulators about the issue, but we are willing to be flexible and empower our businesses to settle with foreign counterparties with crypto as long as it helps solve their problems now. This should be approached carefully and within an experimental legal regime so as to prevent the use of cryptocurrency for domestic settlements.
Now, several final remarks. What are the takeaways from last year? For one, this is the importance of having a robust financial system. In relatively quiet years, we put it through a turnaround programme. As you all recall, that process was painful but banks saw out this crisis without government support. On the contrary, they continued to lend and even were able to provide payment holidays. This is another point to mention: payment holidays were badly needed for people and small businesses, and banks provided 2 trillion rubles worth of payment holidays. It is only a healthy banking system that could afford it.
Our experience last year also highlighted the significance of having your own settlement infrastructure. Moving forward, we will continue to develop it. Another takeaway is the importance of both price and financial stability. This is the prerequisite for sustainable economic development, improvements in wealth, and growth in real household income.
I appreciate your very focused and detailed consideration of all the issues and the many questions you asked. Maybe the most important thing is that throughout the past year we shared our work, our tasks and our objectives. Your support was indispensable to the passing of the laws to enable economic and financial sector development.
Thank you very much for your time.