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CNBC Transcript: Interview with Elvira Nabiullina, Governor, Central Bank of Russia


Following are excerpts from a CNBC interview with Geoff Cutmore and Elvira Nabiullina, Governor, Central Bank of Russia, from the St. Petersburg International Economic Forum in Russia.

GC: Governor, we've had some better looking growth numbers so far this year. And of course you felt able to cut interest rates at the last meeting. So the inflation picture appears to be improving. Can I ask you if we look out to the medium term then. Do you think both growth and inflation are set for a significant improvement in the Russian economy?

EN: We have indeed improved the outlook for the Russian economy due to the fact that as the recent economic dynamics over the last few months have demonstrated that the Russian economy has quickly been able to quickly adjust itself to the external shocks that we saw last year faster than we expected. And we've slightly improved our forecast in terms of this year's GDP growth although throughout 2016 we expect the slow down to continue but at a much slower pace than we previously thought. And inflation is diminishing in accordance with our expectations a little bit faster as well, which allows us to reduce interest rates so we expect that the economy will gradually recover within the next two to three years, which will be supported by the floating exchange rate that acts as an in-built stabiliser helping the economy to adjust to external changes. We're presently observing some structural changes in the economy some sectors are growing faster while others are continuing to slow down but even among those sectors and industries that are demonstrating negative growth we are seeing some entities and points of growth that point towards improvement. In other words the economy is adjusting itself structurally to the new level of oil prices. And we believe that if these processes continue and it will be very important for us to maintain market stability that is why we are pursuing a moderate but at the same time rigid monetary policy in order for inflation to go down, in order for the economy gradually to start seeing long money coming into it and in this way help economic growth.

GC: What do you think are the main reason for those changes has been? What do you think has been the cause of the faster than expected adjustment that the economy has made? Is that corporates? Is that your own management of the monetary system? Or is it down to the government beginning now it seems to really embrace a reform agenda and a privatisation programme?

EN: I think there are quite a few factors. You couldn't pick out any single one of them, which has helped the economy to adjust better. But first and foremost I would identify the behaviour of entrepreneurs who in my opinion seem to have quickly become aware that the conditions have changed significantly and that there's no point waiting for oil prices to improve. That you have to pay more attention to production costs, that you have to close down inefficient operations and build up operations in efficient sectors. Of course the depreciation of the rouble helped because that helped many companies reduce costs and become more competitive. And that is why we have import substitution but this import substitution is to a large extent linked to lower production costs in Russia of those products that we used to import previously. I also believe that this was further assisted by the government targeting monetary budget consolidation in order to maintain macro-economic stability. So all in all it seems to me that the macro-economic stability, the predictability of the financial environment is very important for investors in conditions when we are seeing such serious changes in the external environment. So that is why we are sticking to our target of reducing inflation to 4%.

GC: You've fought a bold and aggressive campaign against inflation but we are now at a point where we see flat month on month inflation prints. You seem to have won and the market is looking at this last cut in interest rates now as the beginning of a cycle for rates to go lower. Could we anticipate that you will now feel... that you can now begin a programme of bringing rates down through 2016?

EN: Yes inflation is definitely going down at a fast rate but in our monetary policy we are adhering to a principle of caution. We want to be sure that inflation will go down reaching 4% towards the end of next year. When we started our inflation targeting you may recall that it was a period when the rouble was depreciating and there was hyper-inflation and we forecast we will be moving toward 4% by 2017 many thought that this was a fantastic target. But now there are more people who believe that in theory this is possible, it no longer looks so unrealistic. It's very important for us to maintain the market's trust and the main thing is to keep the inflation expectations under control so that people and businesses can plan their expenses and operations and for this you need low inflation. So in our monetary policy we don't want to create any risks preventing us achieving our inflation target but undoubtedly the potential for a further reduction of interest rates is there because if you take a look at our nominal and real rates they are fairly high right now but again we are being cautious about this, which is why we are not making an announcement about the start of a cycle of lower rates but we are saying that there is potential and we will be making our decisions depending on how the economic situation evolves, depending on how inflation continues to fall and inflation expectations. Of course there are always external risks that we have to be aware of. The global market is not stable and we need to take this into account as well

GC: So I shouldn't be expecting an announcement in July?

EN: Well in July we'll be having meeting and we'll see.

GC: Let me ask you then. You obviously don't operate in isolation. The global economy has been relatively weak and yet we have a Fed that while it... we have... will perhaps not be in this month. Still seems very intent on lifting interest rates. To what extent is that causing you to pause on a more aggressive cutting agenda?

EN: There's no doubt that decisions made by the leading central banks do affect the global financial markets and consequently our situation. We know and we see, looking back over the past few months and years that the expectations towards a further tightening of monetary policy in the U.S. may cause the outflow of capital from the emerging markets in Russia, Russia is one of the emerging markets. Therefore many countries that are following the Fed, which is already pursuing a more rigid monetary in order to maintain the balance, to maintain the interest rate and not to cause the depreciation of their currencies and consequently avoid inflation going up. In Russia there might be a different situation because for a long period of time we have had quite a tough monetary policy. So we can act on the assumption that we still have room for manoeuvre and make our own decisions with regards monetary policy. Internal factors and internal risks are much more important to us. We are paying attention to them and we are also certainly paying attention to what is going on in the external markets and the decisions that are being made by among other institutions the Federal Reserve. But I would also like to note that it is very important that the Fed is very actively communicating with the markets and we see that investor expectations often reflect the kind of decisions that may happen in the future. So we do not expect any dramatic changes in the market right now because everything is being done more softly, so to speak, so we hope that this normalisation of monetary policy in the U.S. will be fairly smooth without leading to any big discrepancies with market expectations.

GC: A number of central banks are making preparations for next week in case Britain votes to leave the EU. Can I ask you here, are you making any plans for special liquidity provisions in case there is some disturbance in the global economy as a result of a vote to leave?

EN: We have had discussions to try to analyse the possible aftermath of Brexit and the consequences for the Russian economy. There is no direct consequence for the Russian economy because we have a fairly low level of mutual trade with the U.K. and not very significant high level cooperation in the financial sphere. So we are definitely taking into account this type of risk and in the event that they happen we have a full set of instruments to use in the turbulent environment of the external markets because we have recently been through this sort of turbulence. So we have the full set of tools necessary to cope with it. If there is a need we can apply them but honestly I do not see any risks for the Russian economy because of a possible Brexit.

GC: Is there not a chance that we'll get very disorderly movements in currencies?

EN: I do not think that any specific disorderly movements will happen. There could be certain exchange rate changes but presently because of various circumstances we can see quite a broad movement of different currencies against each other. If you look at the volatility of currencies in various different countries it has risen due to the effect of different factors over the last few years. And due to this heightened volatility of prices for financial assets including currencies I believe that the central banks of many countries are ready to handle this sort of volatility and continue working with this sort of volatility. It's not very good but central banks do take this into account and are ready for it.

GC: What impact do you think it would have on global markets?

EN: I think that volatility may rise slightly for some time but some time afterwards the market will find some sort of balance as it often does and will stabilise at a certain level in terms of foreign currency and financial asset prices.

GC: So if Brexit is not a major worry for you at this point. What are you concerned about because we've clearly seen a doubling of the oil price from its recent low, which again has some implications for how the rouble is traded and I wonder if you're concerned that maybe it's become too strong here. We also know that the Russian economy is becoming increasingly interlinked with the Chinese economy and yet we worry about the Chinese growth slowdown and excess debt. You're in the middle of these two storms, which of them is keeping you awake?

EN: Among the external factors I would probably say that there are two that catching our attention for sure. One or two and that is probably oil prices but as we have seen thanks to the floating exchange rate the Russian economy is more relaxed in terms of its response to the changes in oil prices because as we've seen in the latest episodes at the end of last year and the beginning of this year when oil prices fell very significantly. But from the point of view of capital outflow as well as the currency exchange rate the response was much more relaxed than the reaction experienced at the end of 2014. Of course oil prices do affect the rate of economic growth, which continues to remain significantly dependent on the energy sector not being sufficiently diversified. But nevertheless we believe we have the necessary in-built stabilisers. The second important factor is the Chinese economy and its dynamics. But what we are seeing and observing in the actions of the Chinese authorities does seem to speak in favour of a transition from an export oriented economic model to one oriented towards domestic consumption in the service sector. This will happen gradually and in a controlled managed manner and there will be no major risks for the global economy. But we are attentively following what is going on in the global markets. And if we are talking about domestic factors that we are concerned about I would point towards structural reforms. If the rate of economic growth and development is to be higher than the 1.52% that we have forecast for the next three years if there are no structural reforms. If we want a higher rate of growth above 1.52% structural reforms are of course needed because then the potential for economic growth will be increased.

GC: We've seen the government get a Eurobond away. The first time since the imposition of sanctions and now some of the smaller mid-sized banks are finding access to foreign capital Otkritie for example I think has managed to raise over 100 million through the use of other banks and facilities. So it seems as though there is a change in the international perception of how Russia is doing. Do you feel that when you talk with your central banking counterparts around the world that the view of Russia is different now to how it was maybe six months, twelve months, eighteen months ago?

EN: Yes, we are seeing that gradually foreign investors' perceptions are changing for the better with regards the Russian economy and future opportunities for investing into Russian stocks and securities. And the recent Russian ministry of Finance bond issue demonstrated that. And as you rightly said many of our companies have access to western capital markets. And we associate this with the fact that the economy is indeed demonstrating the capacity to adjust to these new conditions faster than many expected, than we expected. And indeed investors at the beginning of these turbulent times expected the economy to exhibit an even greater slow down, for there to be a more extended period of financial instability. But the Russian economy has demonstrated its resilience and it is important that under these circumstances we have been able to maintain macro-economic stability and we are continuing to adhere to a purely market approach with regards the regulation of the financial sector and the economy in general. So I would say that any concerns that any restrictive measures are going to be imposed have been pushed to the background.

GC: Let me finish with the outlook here for other economies and central banks and what they might do. You took a brave decision to take the rouble free floating and you've stuck with that despite of some of the challenges. In Shanghai in February there appeared to be an agreement globally that there would be some stability in currencies and countries wouldn't use currency wars as a way of trying to seize growth. We're at a point where the Japanese are struggling to get growth and other economies are also suffering. Do you worry that that Shanghai consensus is breaking down and that we might see competitive devaluations through the rest of this year?

EN: I see very little risk of any serious currency wars breaking out. I think that many central banks and financial authorities understand that any long term attempt to compete through an artificial depreciation of their currency will not be very effective in the long term. Because we're very strongly dependent on each other and in theory we should be looking to boost the global economy and global trading so that everyone will derive benefit from the consequent growth. You need to increase the size of the common pie rather than cutting it into pieces. For our part we have been able to learn from our experience the advantages of using the floating exchange rate of the rouble, defined by market factors. Because an artificially depreciated or artificially appreciated national currency may lead to their own negative consequences in the form of financial bubbles or high inflation and so on and so forth. It seems to me that a market exchange rate, which is not artificially controlled by central banks enables one to balance the interests of different market players - exporters and importers, investors, borrowers, lenders. So I think many have learned this through their personal experience. Therefore, I hope there will be no currency war of this sort.

GC: Thank you very much...


Sarah Whiteacre


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