Elvira Nabiullina: Review of Russia's economic and financial
developments in 2015
Statement by Ms Elvira Nabiullina, Governor of the Bank of Russia, at the plenary meeting of
the State Duma of the Russian Federation, Moscow, 14 June 2016.
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Good afternoon, dear colleagues!
Today we present the latest Annual Report of the Bank of Russia to the 6th State Duma. First
of all, I would like to thank the deputies for the legislative efforts, which we took together to
both develop the financial system and protect the rights of financial services consumers, and
for the efficient cooperation with the Bank of Russia. As many as 130 laws affecting the
financial sector have been adopted over these three years.
Now, let's look at the Bank of Russia's performance in 2015.
A sharp deterioration in external environment in late 2014 - early 2015 (oil price drop and
sanctions) triggered turbulence in the external market and followed by a surge in inflation.
These developments required measures to stabilise the situation and help the economy adjust
to the worsened conditions.
The first one is a transition to a floating exchange rate of the ruble. This is a pivotal systemic
measure. Though this transition was not a smooth one, I would like to stress, should we have
failed to take this step, according to our estimates, the economic downturn could have been
deeper.
Now the floating exchange rate works as an embedded economic stabiliser that mitigates the
external shocks. This is why inflation did not shoot up and financial stability indicators were
normal during the new spirals of oil price fall in August-September 2015 and December 2015
- January 2016. The floating exchange rate also allowed us to save gold and currency
reserves, a cushion for the national economy.
The second one is a moderately tight monetary policy, which allowed us to drag inflation down
and move towards the 4% target by the end of 2017. In spring 2015, inflation came up to
15.0%, stood at 12.9% as of the end of last year, now it is 7.3%, and we expect a 5-6% inflation
by the year end.
When deciding on the key rate we always consider the economic environment. Therefore, after
a dramatic key rate hike to 17% in December 2014, we were cutting it to 11% in the first half
of 2015 and subsequently suspended the reduction as inflation risks had grown. On 10 June,
the latest Board meeting decided to cut the key rate to 10.5%.
Our monetary policy is guided by strategic priorities, consistency and adherence to market
methods. We relied on conservative forecasts in our decision-making; unfortunately, it was a
reasonable thing to do during the whole of 2015.
As a result, we have managed to preserve confidence in the financial system, and the alarming
assumptions that capital flow can be restricted or the printing press can be launched are no
longer taken seriously.
The third one is special measures of temporary or limited nature. We applied them because
the external conditions throughout 2015 were persistently challenging, even extraordinary, and
really required the Bank of Russia to take special substandard measures.
The Bank of Russia used special-purpose refinancing instruments which somewhat backed up
the real sector in the fields where the market failed: project financing, non-commodity exports,
and small business.
Now, the upcoming transition to structural liquidity surplus is putting the expansion of
specialpurpose instruments on hold. The efficiency of these instruments varies, that is why we will
focus on fine-tuning them. Thereby, we have revised the criteria for driving non-commodity
exports in order to focus on technological and manufacturing projects. As for project financing,
we will refinance liabilities only for the projects already selected by the Interdepartmental
Commission. The use of allocated limits only slightly exceeds 70% or 97 billion rubles.
To solve the issue of external debt repayments, FX refinancing instruments were used.
As a result, the external debt shrank by $84 billion, i.e. by 16%, in 2015. The total debt
reduction for the two years was 30%. It means that the debt burden for our economy has
decreased considerably.
Banks' demand for foreign currency, provided by the Bank of Russia, was sinking noticeably
over the past year and we are gradually abandoning these instruments. We expect banks to
redeem the FX debt by the end of next year.
We offered banks temporary regulatory easing to support the financial system. It reached the
target and was curtailed by the end of last year. Thereby, we backed up the capability of the
banking system to lend to the economy, but avoided risk accumulation triggered by excessive
regulatory easing.
We have managed to preserve households' confidence in financial institutions: instead of a
bank run we saw ruble deposits growing by 25%.
What are our current objectives? It is the interest rate policy that will allow us to achieve the
4% inflation target by the end of 2017. Our inflation targeting principle is that the Bank of Russia
does not curb inflation at all costs, but considers the economic environment and financial
stability issues when taking decisions. I insist that the policy of dragging inflation down to 4%
is in line with the general economic policy designed to create conditions for the economic
growth.
Lending will see a transition from structural liquidity deficit to structural liquidity surplus, and
this is a very important development. So far, the Bank of Russia issued loans to banks which
reached up to 4 trillion rubles last year. Now, as the budget spends the reserve funds, the Bank
of Russia will absorb this liquidity (through deposit operations, among other things) to keep the
interest rates manageable, and we are already preparing a trial issue of Bank of Russia bonds.
This tuning of monetary policy instruments will ensure manageability of interest rates in the
money market, in lending and in the economy as a whole.
On the development of the banking sector.
The Bank of Russia sought to pursue a balanced policy in developing the banking sector. On
the one hand, we helped banks adjust to the new conditions and eased banking regulation, on
the other hand, we stuck to the policy of resolution of the banking system and countering
fictitious transactions. Our key objective is to have a sustainable, capitalised financial system
capable of funding the economic growth.
In 2015, the banking system accumulated capital, household deposits recovered, and lending
to the real sector grew slightly.
In the first half of the year, the banking system suffered losses, but returned to profits by the
year end. Profit stood at 192 billion rubles in 2015, and 234 billion rubles in the first five months
of 2016. In 2016, we expect profit to be about 500 billion rubles.
To develop the banking regulation, the Bank of Russia continued to introduce international
standards, including Basel regulations, implemented compensatory measures to ease the
adjustment of the banking system to the new environment, and introduced its own regulatory
measures which take account of the specific risks of the Russian banking system. We
continued to pursue a sequential policy of banking sector resolution. Unfortunately, the pace
of licence revocation was high. Here we seek to occupy a more proactive position in
supervision, and take early warning and preventive measures. For this purpose we improve
our internal procedures. Thus, we decided to establish a risk assessment service.
We believe that, in order to prevent problems at an early stage, the Bank of Russia should be
granted the right for professional judgment, because the current strictly formalised approach
to banking supervision often does not allow us to intervene when banks still have some assets,
i.e. the owners have not yet withdrawn all of them. It is important mainly to protect creditors'
rights.
The changed attitude to resolution also needs further discussion. Resolution has become a
more frequent measure. We tightened requirements for turnaround managers over the year
and will continue to do so.
Now about the Bank of Russia's activity as a megaregulator.
We seek to enhance cross-sectoral approach in supervision and regulation, and in 2015, we
worked out the first key document covering all sectors of the financial industry, 'Guidelines for
the Development of the Russian Financial Market in 2016-2018'. This document is envisaged
by the law. We held detailed discussions of this project with business associations, including
in parliamentary hearings, presented it in Russian regions for businesses to understand and
contribute to our measures to develop the financial market.
Some words about our achievements in the sector of non-bank financial institutions.
Today, OSAGO is likely to be the most socially significant type of insurance. Let me remind
you that in 2015 the tariffs were adjusted for the first time since the introduction of the
compulsory motor insurance. By that time the situation in the OSAGO market was a
challenging one. In some regions it was almost impossible to buy the policy without additional
foisted services, there were difficulties with reimbursement of damages. The overall situation
has improved, but some regions still experience difficulties with OSAGO. We have introduced
an electronic OSAGO policy. For now, only 200,000 electronic policies have been issued, that
is not many. Therefore, we welcome the law that would bind insurers to issue an electronic
policy upon the customer's request from January 2017.
Last year, we improved the European accident statement rules - documenting road traffic
accidents without involvement of the road police has become easier and more convenient.
Microfinance organisations. Microfinancing is discussed with fervour. I would like to stress, that
we believe it to be short-sighted to ban microfinancing. Short-term loans are in demand and if
there is no regulated business, consumers will turn to illegal lenders. We took measures to
ensure better protection of citizens' rights, primarily, by limiting the maximum effective interest
rate and fines and interests on overdue loans. And I believe we should move from the fourfold
maximum to the twofold on the legislative level.
As for illegal lenders, this problem needs a legislative solution, among other things. The
accountability of illegal lenders is currently not very serious, so to say. Moreover, ironically
enough, the illegal lender can recover the debt in court. We believe it to be important to deprive
agreements with illegal lenders of relief at law.
Non-governmental pension funds. We have established a system of pension savings
guarantees. Now it includes 38 of 91 eligible funds inspected by the Bank of Russia. Many
funds had to improve the quality of their assets to enter the system.
Furthermore, actuarial industry has been launched in compliance with the law; today we have
a bit more than 100 actuaries. They are active and it is an important segment of the financial
market established last year.
We have almost stamped out unscrupulous depositories which provided bogus excerpts on
available securities. We implemented our function of a megaregulator which allowed us to
make cross-checks and reveal such situations immediately. We took measures under the
project "Clean Register".
We have developed and are implementing the road map on electronic communication in the
financial market. Electronic communication decreases companies' costs and ultimately the
price of services for consumers, provides adequate financial inclusion to avoid having
dependence on actual branches.
New digital technologies quickly transform the financial sector. We have established a special
technology and innovation task force at the Bank of Russia which is to study technological
trends in the field of finance, and to timely reveal the areas requiring regulatory and supervisory
changes. We seek to avoid hampering the development of new, more efficient and
userfriendly technological solutions, but prevent accumulation of risks capable of mitigating
consumer right protection. Last year we established a Centre for Cyber-attack Monitoring and
Response in the Financial Sector (FinCERT), which provides, among other things,
methodological assistance in ensuring the highest possible cyber-protection to market
participants.
We always cooperate with the market in financial technologies and innovations. Thereby, in
2015, we held the first forum on innovative financial technologies; it was in demand with
businesses and we are going to hold it again in autumn.
We have established an institution of bond programmes. The development of debt instruments
is extremely important for our financial market, because it is the best instrument for large
companies, while banks should be more focused on lending to small and medium-sized
businesses.
In 2015, we laid foundations for the development of a national rating industry, and the new
legislation allows us to expect that a really respectable and professional rating industry will be
built in our country.
Now about the national payment system.
In 2015, operations and clearing centre of the NPCS was launched. It processes all operations
made in Russia through cards of international payment systems. The transfer of payments into
Russia was implemented in a very short period due to external risks but its implementation
was of high technological quality in line with international standards. In the end of the last year
a pilot issue of national payment system cards Mir was implemented. The cards are already
issued by banks of the Crimea (and accepted throughout the Crimea) and some other banks.
The mass issue of the cards is to start in the second half of the year.
Besides, we have improved the system of Bank of Russia financial messaging system, a
SWIFT counterpart. It complies with all SWIFT formats and everyone can use this convenient
format to transfer messages domestically. We closely cooperate with our colleagues in Belarus
and Kazakhstan in coordinating the development of the national payment systems.
Some words about countering fictitious transactions.
According to our estimates, fictitious transactions have shrunk by about one-third. The
monitoring has become more efficient. Fictitious transactions in the non-bank sector are better
revealed due to, among other things, our thorough inspections we can implement as a
megaregulator.
In 2015, quite a few unscrupulous players were swept off the market: 93 banks, 96 insurance
companies, 21 non-governmental pension funds, 1,703 microfinance organisations, and
609 professional securities market participants. One of the reasons behind it was servicing the
shadow sector of the economy.
Looking back at the year, I would like to say that it was undoubtedly challenging with external
environment constantly changing for the worse, but for all that we have achieved some
important results. First, the economy showed its adaptability, and not a passive one. We can
see that new sectors, the whole sectors have managed to grow amid an extremely worsened
environment. There were also enterprises in the generally failing sectors which took the new
possibilities and show potential for development. Second, the last year clearly signalled that
structural reforms are needed for the economy to return to sustainable growth; and removing
internal restrictions is a short-term objective. I am convinced that we will manage it.
Thank you for your attention. Thank you.