Chairman of the Central Bank Elvira Nabiullina in a long interview with Forbes - about the reasons for the transition to a floating ruble exchange rate, increasing compulsory motor liability insurance and trust in the banking system

On the eve of the March 8 holiday, Forbes begins publishing a series of interviews and materials about women managing Russian finance, the oil and gas industry and other strategic industries. The first heroine is the Chairman of the Central Bank of Russia Elvira Nabiullina. This is the full, magazine version of the interview published on the Forbes website on February 3 .

In 2014, the Russian economy changed dramatically: growth gave way to recession, the ruble weakened greatly against the dollar and euro, and inflation returned to double digits for the first time in several years.

Many experts and officials believe that one of the reasons for the rapid weakening of the ruble and the acceleration of price growth is the decision of the Central Bank to switch to market exchange rate setting. However, Central Bank Chairman Elvira Nabiullina is confident that without this decision it would have been even worse - with low oil prices and sanctions, fixing the exchange rate threatened to deplete international reserves and subsequent devaluation, even more painful for business and the population.

According to Nabiullina, the Russian economy needs to learn to live in new conditions. The Central Bank will continue to fight inflation, expecting it to drop to 4% in two years. Problem banks will have their licenses revoked or will be reorganized. The Central Bank hopes that there will be fewer such cases than in 2014.

Forbes: The Central Bank’s statement on November 10, when it announced the transition to a free exchange rate, also said that the Central Bank is ready to support the ruble in the event of a threat to financial stability. How do you define this threat for yourself?

Elvira Nabiullina: Such a threat is not always associated with the level of the exchange rate, because financial stability is a broad concept. This could be instability in the foreign exchange, money, or interbank markets. There are quite a few other indicators, for example the behavior of bank depositors or corporate clients. One of the factors that can lead to a violation of financial stability is an excessive and prolonged deviation of the ruble exchange rate from the so-called fundamentally justified one. But if such a deviation does not affect other important indicators, then the Central Bank will not intervene. Moreover, if we see threats to financial stability, we can use other tools, not just interventions.

Is it possible, in your opinion, for the price of oil to fall to $25 per barrel?

In the short term, everything is probably possible, but I do not believe that the average annual price will be at $25 in the near future. These are too big shocks for the global market - economic and financial.

What anti-crisis measures are possible from the Central Bank, other than those that have already been announced?

In my opinion, we have implemented the main decisions - the transition to a floating exchange rate, inflation targeting. As for the stability of the banking sector, we will continue the policy of rehabilitation in the banking system. Our task is to ensure that all banks can fulfill their obligations to depositors and creditors. Last year, banks' total profits fell significantly, by more than 40%. Part of this decline is due to our reserve requirements. Banks additionally created reserves of more than 1 trillion rubles. This reduced their profitability but increased transparency. But if this or that bank has serious problems, we will revoke the license or carry out financial rehabilitation. As for monetary policy, we will develop foreign exchange refinancing to reduce the burden on the balance of payments.

Now the term “systemically important enterprises” is returning. Is direct support from the Central Bank possible or is it excluded?

No, It is Immpossible.

This year there will be a discussion in the government about the pension system. Will you still insist on maintaining the funded part or will you support the transition to a completely solidarity system?

Of course, I will insist on maintaining it, because one of the most serious problems for economic growth is the lack of domestic investors. Pension funds and insurance companies are the anchor institutional investors that make investment growth possible.

Some officials say that state banks and individual state-owned companies want to trade currency directly with the Central Bank, bypassing the stock exchange. Supposedly there was such a conversation about Sberbank, but the Central Bank always said: no, go to the market.

And we continue to do so.

Why? After all, in principle, this is a tool to reduce pressure on the ruble.

Because the rate must be market rate. The market will then have so many suspicions, at what rate, I wonder, to whom and what was sold. If some major transactions take place directly, without taking into account market demand and market supply, this will cause market distrust and distortion of the real price of the currency.

The relaxations that were given to banks in December allow them to actually violate the regulations. Don't you think this undermines confidence in the banking system?

No, we did not allow the standards to be violated, but we allowed them to be calculated temporarily differently, so that there would be no shock to the banking sector from a sudden serious change in both the exchange rate and the value of the securities portfolio. These decisions are made to absorb shock. We know the situation in banks as a whole, and our decisions do not allow us to hide any risks and chronic problems. But they prevent banks from looking worse than they really are. I would also like to note that these solutions are temporary and we will abandon them after the market finds a stable equilibrium.

You said that a significant part of the work to clean up the banking system has been completed. Nevertheless, can we expect bankruptcies of large banks in the near future?

We will continue the policy we have pursued. We always evaluate the cost-effectiveness of financial recovery as an alternative to license revocation. When we allocate money for rehabilitation, the volumes must be comparable to those that would have to be paid to the insured persons if the license was revoked. Of course, we take into account the systemic importance of the bank. Also, to make a decision on resolution, it is important that the bank is not involved in questionable transactions.

We would like to avoid large banks accumulating risks, believing that everything is allowed to them and they will never be liquidated. We are preparing to introduce additional capital and liquidity requirements for systemically important banks. We pay special attention to the supervision of systemically important banks; we created a specialized department more than a year ago. As for the DIA, it is a misconception that we make decisions with an eye on whether the DIA’s money is enough or not. The DIA always has enough money. Firstly, the DIA has accumulated reserves, and secondly, the DIA’s resources are constantly replenished, because banks pay contributions quarterly. And thirdly, if the DIA suddenly runs out of money, we will always give them a loan.

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There have been many bankruptcies in the banking sector in recent years, but virtually no bank owners have suffered, despite the criminal nature of many bankruptcies. Why?

This is a really thorny issue. It is necessary to increase the responsibility of owners and managers for the situation in banks. This is one of the problems that we need to solve in the near future, I agree. We have certain mechanisms to combat unscrupulous bankers. For example, when we give consent to the assignment of shares, the owners who performed negatively in the previous period will not receive such consent, as well as managers. But these measures are not enough.

In recent years, consolidation has been taking place in the non-state pension fund market; the owners of many funds are bankers and developers, whose business is the first to suffer during a crisis. Are you not afraid of bankruptcies in the non-state pension fund market?

I'm not afraid. We do have some intertwining in the ownership of NPFs and banks. And because, for example, we revoke a bank’s license or do not allow non-state pension funds into the guarantee system, risks may arise in the related structure. It certainly can be. But we have mechanisms to solve the problem. In some banks, our depositors are still protected, and now the protection of deposits has risen to 1.4 million rubles. A pension savings guarantee system is being created for NPFs. In the first year, nine funds were admitted to this system. This is 10% of their total number, and in terms of assets it is slightly more than 50%. When the bank deposit insurance system was launched, the “first wave” included 400 banks, almost 40% of the total number at that time; these banks accounted for more than 70% of assets. That is, now control over non-state pension funds is even stricter.

Is it possible that the cost of compulsory motor insurance may increase due to the devaluation of the ruble?

At the beginning of April, legislative provisions increasing the limits of payments under compulsory motor liability insurance come into force. Plus devaluation, due to which the cost of spare parts has increased. These are good reasons to increase your insurance rates. So yes, there will be an increase in cost. We will also publish a new corridor of acceptable prices for compulsory motor liability insurance by April.

Let's return to the events of the end of 2014. Why move to free exchange rate formation at a time of serious pressure on the exchange rate due to falling oil prices, sanctions, and slowing economic growth? It was impossible to postpone this decision, say, to mid-2015?

We announced the transition to a floating exchange rate on November 10. At this time, the exchange rate was under strong pressure due to falling oil prices. There was also speculative pressure, because under the influence of the dynamics of oil prices, absolutely unidirectional expectations of market participants were formed. Therefore, it was imperative to make a decision on market exchange rate formation so that the exchange rate would find equilibrium, otherwise we would continue to spend gold and foreign exchange reserves and spur the activity of speculators. We decided to switch to a floating exchange rate, but in order not to aggravate panic in the market, the Central Bank continued to make foreign exchange interventions on certain days. And market participants became hooked on our frequent interventions. That is, we announced a floating exchange rate, but in fact the transition had not yet happened, since we continued to support the ruble.

To briefly and directly say what happened on December 16, there was a de facto transition to a floating exchange rate. Market participants realized that the exchange rate is formed solely on market grounds. Yes, that day there was a sharp jump in the exchange rate, but after that it began to strengthen. We assumed that volatility could be high. But what alternatives did we have? We had an alternative to fix the course. There are two ways to do this. Or spend gold and foreign exchange reserves, but with such expectations for the long term this is absolutely unproductive; we would have reached the same result after some time, only without gold and foreign exchange reserves and, accordingly, with greater vulnerability to external shocks in the future. Or introduce administrative restrictions, but I think this is absolutely wrong. There was only one way out - the transition to a floating exchange rate and finding an equilibrium point that would correspond to the state of the Russian economy, the state of the balance of payments.

Don’t you think that the decision on free course formation could have been made earlier?

As long as I’ve been working here, criticism comes from different sides - sometimes it’s premature, sometimes it’s too late. Indeed, in the summer there was a calmer situation, and no one at that moment could predict the combination of factors that influenced the weakening of the ruble in the fall and in December: such a dramatic decline in oil prices, and the almost total closure of financial markets for our companies and banks, and quite large payments on external debts. Therefore, in the summer we continued the policy of gradual transition to a floating exchange rate, which was in line with market expectations.

One cannot help but recall Rosneft’s placement of bonds worth 625 billion rubles and the Central Bank’s statement that banks can refinance using these securities. To what extent was this deal a catalyst for what happened on December 16?

I believe that, indeed, the Rosneft deal was opaque, it was incomprehensible to the market, and was an additional factor of volatility in the market. But still not the main one. In fact, I heard the opinion that the deal gave rise to expectations that the proceeds of the rubles would go to the foreign exchange market and depress the exchange rate. But the Central Bank regulates the volume of liquidity so that the money market rate is within the interest rate corridor - plus/minus a percentage point from the key rate. And if we provide money for some instruments, we reduce the provision of liquidity for others. Therefore, fears that this deal would collapse the exchange rate were unfounded.

Did you have any concerns about rising social tensions due to the decision to “unlink” the course? Still, the population is sensitive to exchange rate fluctuations.

I am convinced that it is much more important for people to curb the rise in prices for goods than the exchange rate. It is clear that the exchange rate, through imported goods, through public spending on tourism services, etc., affects the well-being of citizens. But still, citizens mainly consume Russian goods, spend money here, and it is important for them that prices do not rise. In order for the impact of imported goods on the price index to be less, we must have effective import substitution. I specifically emphasize the word “effective” because the replacement of imported goods with Russian ones should not occur at a higher price and at the expense of quality. Of course, people with higher incomes, who have a higher share of consumption of imported goods and who travel abroad more often, have suffered the most in terms of objective purchasing power. We decided to switch to a floating exchange rate, among other things, to curb inflation. In order to maintain the standard of living of the population at a normal level, to prevent a painful rise in prices.

It happened the other way around.

No, it didn't work! Inflation could have been much higher if we had not switched to a floating exchange rate and raised the rate. The factors that acted during that period to weaken the ruble were very powerful: the price of oil fell sharply and large payments on external debt. Of the $151 billion in capital outflows in 2014, a significant share was the payment of external debts. If inflation were higher, it would be more difficult to slow its growth.

The situation in the economy has really changed: completely different, more complex external conditions, greater debt load in the private sector. In these circumstances, it is simply naive to expect that everything will be as before.

Maintaining the ruble exchange rate in these circumstances is simply creating the illusion for some time that nothing has changed, and then being left with nothing. Now the economy must adapt to the new reality, increase its competitiveness, and increase labor productivity. We are accustomed to the fact that our productivity grows more slowly than our income. This was possible in conditions of high oil prices and high economic growth rates. Now we must learn to live differently: well-being must increase along with productivity. This is a challenge for our economy, and we must respond to this challenge. Our goal remains the same - inflation of 4% in 2017.

Why should it work out now if it didn’t work out before, including when you were minister?

It must happen right now, because it is vitally necessary. Success depends on both the motivation of people and the conditions. We had a low interest rate for a very long time: the year before last - 5.5%. It was during this period that, despite cheap resources, the rate of economic growth and investment slowed down. Now we can say that only the rate is to blame for everything, but if you look at how enterprises manage their profits, you will see that they are in no hurry to invest it in new projects and modernization of existing ones. This means that we need to eliminate the reasons that force businesses to behave this way.

Have you quantified the impact of various factors, such as falling oil prices, on the weakening of the ruble?

Of course, but this is not a once and for all analysis, because the situation is changing. Now the most powerful factors that influence the exchange rate are the dynamics of oil prices and sanctions, primarily the restriction of access to financial markets for Russian companies and banks. The contribution of each of these factors to the weakening of the ruble at the end of December is approximately 30%. The rest are factors related to the policy of the US monetary authorities, that is, the strengthening of the dollar against the currencies of developing countries, and panic in the market during a certain period. In January, exchange rate dynamics were 80% dependent on oil prices. Again, these factors are variable, so a linear relationship cannot be drawn. But there is a fundamental connection: the stronger the economy, the stronger the exchange rate.

Then is it possible to talk about strengthening the exchange rate if, according to all forecasts - both expert and official - we will not have any growth for at least three years? Plus, new sanctions and a further decline in oil prices are possible.

Despite all the negative external factors, the Russian economy has potential and every opportunity to grow. We have all the resources, an educated population, and labor is not very expensive. Education, science and infrastructure are sufficiently developed.

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“The stability of the banking system is very high”

Forbes invited experts and market participants to ask Elvira Nabiullina a question. We publish the most interesting answers.

Alexander Koval , President of the Union of Insurance Organizations:

The purpose of creating the mega-regulator was to increase the efficiency of management of the financial market, including the insurance market. But the quality of insurance services and the financial stability of insurance companies have deteriorated. Within the Central Bank itself, several departments are responsible for the insurance market, which often do not coordinate their actions. Why is this happening?

The state of the industry primarily depends on the economic situation, which dictates the demand for insurance products and determines the quality of insurance reserves. I do not believe that the statement about the deterioration of the industry is true. The problems that have come to light in individual insurance companies are the result of many years of hidden problems.

Vladimir Tikhomirov , chief economist of BCS:

The Central Bank provides banks with several trillion rubles of liquidity almost every week. Does this mean that the situation in the banking system is bad?

We do not support the stability of banks or their solvency through regular liquidity provision instruments. We are making up for the structural liquidity deficit that has formed due to various objective reasons. For example: if in the first week we provided two trillion at the repo auction, and the next week another two, then they cannot be added up. In the second case, this is largely the provision of liquidity to pay off old debt to us. That is, this does not mean that an additional two trillion are poured into the banking system every week and thus we are spurring inflation. In no case. If we talk about the stability of the banking system, then in general we have control over the situation. It is clear that risks will increase because economic growth is slowing down and asset quality is deteriorating. But we have every opportunity to maintain stability in the banking sector.

We have come most of the way to clear the market of chronically unstable banks, and the way the banking system is going through a difficult period of exchange rate changes shows that its stability is very high.

Alexander Morozov , chief economist at HSBC for Russia, Ukraine and Kazakhstan:

Under what circumstances and conditions will the Central Bank be ready to strictly support the ruble exchange rate?

The Central Bank will enter the foreign exchange market in case of threats to financial stability. This means that without pre-announced rules for the market, we can come out with interventions of any required volume. But we cannot disclose the conditions of possible interventions, in particular because this plays into the hands of speculators. When it is unknown under what conditions the Central Bank will enter the market, speculative strategies are much more risky.

“Keeping the ruble exchange rate is creating the illusion that nothing has changed”