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CNBC interview with Elvira Nabiullina, Russian Central Bank Governor


Following are excerpts from a CNBC interview with Elvira Nabiullina, Russian Central Bank Governor and CNBC's Geoff Cutmore.

GC: Governor I wanted to start by asking you if you can help us understand how you're looking at the current trend in inflation. Do you think weekly inflation will continue to rise from here?

EN: We see the trend of declining of in inflation – I would to mention that inflation two years ago was about 17%, December it was 5.4%, in April it was 4.1% - weekly inflation is consistent with our target top achieve the inflation of 4% by the end of this year. Now we are very close to our target. But what is important for us not to have the inflation once 4%, but to maintain to sustain this inflation plus minus 4% for medium term, for longer term.

GC: So there are those analysts that say that interest's rates are still quite high given where you've got to on the inflation rate. Are you perhaps concerned that inflation is not coming down quite as sharply as you had hoped and that's why you're holding back on moving more quickly on cutting rates?

EN: According to our internal research, our neutral real interest rate could be 2.5, 2.75 %. That means we stayed at 4% inflation we could have 6.5, 6.75% of nominal rate. Our key policy rate is much higher now as you have said. Why? Because we have this elevated inflation expectation. They are not anchored, they're higher than our target. That's why we are trying to keep this toughness of our policy to achieve our target for medium term. Of course we see some inflationary risks related to the dynamic of oil prices – now they are quite high but who knows that dynamic of oil price is not very predictable we can say.

GC: So let me just be clear then, you are concerned that this drop in inflation may only be a temporary phenomena?

EN: We see some factors behind this drop in inflation. Inflation declined faster than we expected, it's true but it's declined because of our tough monetary policy to the significant effect but we see some temporary factors. The first is pass through from global appreciation due to higher oil prices than we forecast, our forecast was $40 per barrel. Now it's about $50 per barrel and even more. And other factors which can be temporary, it's unusually a low fresh food price growth in the first quarter of this year and we see that some season adjusted and inflation could be. But our policy, we are more confident that with our policy we could achieve our target and we have almost achieved this.

GC: We have an OPEC deal extension. The price, after dropping a little, has now steadied around $49 or $50 per barrel. Given that this new deal has been struck, you have new information about what the oil price will do. Do you think you are being overly pessimistic by thinking 40 when you should be thinking 10 dollars more, 50 for the average for the rest of this year. And that does change when you need to think about inflation and interest rates.

EN: I think we should be cautious. We should be conservative and we should consider some inflationary risks. Of course, this agreement with OPEC has supported oil prices. At least in short term. But it's very difficult to predict the dynamic of oil prices for longer term because we don't know exactly what could be the reaction of shale oil, we see that technologies are developing and we think, I think that oil price dynamic medium-term could be in the range from 40 to 50 dollars per barrel. And we will revise our forecast in mid-June and our forecast and our baseline scenario is $40 per barrel but maybe for this year we can revise it up. But I think once more again we should be very conservative in our monetary policy. We cut our interest rates and I think we have room for easing more but the pace of this easing will depend on the economic situation, on actual inflation, on inflationary expectations on the dynamic of oil prices. We are data dependent and every meeting, every policy setting meeting we analyse all these factors and we decide the next step.

GC: Governor the analyst community feel that some of the interest rate action you have taken has been less about inflation and more perhaps about taking some of the sting out of the strength in the Ruble recently. I wonder if you could just shoot that down for me if that's not true, that you're not watching closely the Ruble level.

EN: I wish we have this shift in policy and now we have this policy of free floating, I think that free floating regime has some negative impact for the economy because the economy is not used to this volatility of our currency but I'm absolutely sure that this regime has more positive things and more benefits for our economy and we don't want to intervene in currency market and we don't use our policy rate to influence currency because I think the currency should be set on market basis. In this way the currency rate will play this role of absorber of external shocks. I'm not for this intervention or through direct interventions in currency market or indirectly.

GC: I know you don't give much away around adding to reserves of the actions you take in the currency markets yourself but would it be fair to say that you use these periods of strength in the Ruble to top up reserves that have been depleted on other occasions. Is that currently how you are thinking about this Ruble strength? A good time to buy gold, add to dollars, add to Euros.

EN: We can start replenishing our reserves as I've said already many times. But this policy of replenishment of our reserves could be only on the basis when we think that it doesn't harm our inflation target. We haven't reached the target fully. 4.1% for one month, it's not enough. We should assure the medium-term stability of inflation and the trust and confidence of people of businesses that inflation will be stable and low for a long time. It's not happened yet.

GC: When you look at the outlook now for growth, this year and next and the strength of the Ruble, and clearly the inflow of capital that is supporting that strength do you get the sense now that the economy has overcome, in the last three years, the negative effect of sanctions, that actually Russia has dealt with the sanctions and the economy shown it's more resilient than many thought?

EN: I think that the Russian economy has overcome this effect of sanctions, it's sure. We see that our estimation that Russian economy had turned to growth in mid-2016 and now it's stronger. But we think that the potential growth is not very high - it's about 1.5%, 2% - and we need more structural reforms to increase this potential economic growth. But the effect of sanctions and even the effect of our oil price drop, which was more significant for Russian economy than financial sanctions, I think the Russian economy will overcome this.

GC: Are you optimistic then that Mr Kudrin's plan that will be revealed in St Petersburg will help with that programme of reforming the economy?

EN: I think that we need some comprehensive economic policy with coordinated monetary policy, fiscal consolidation policy and robust agenda of structural reforms, it's true but we need to discuss these reforms. The first aim of these reforms I think to improve business confidence, to improve investment climate to create more incentives for business to invest in Russia. The situation is improving, I think it will continue to improve further.

GC: And looking at the international picture, you have said that you are not totally believing the economic recovery and the growth that we're seeing in the west. That you have some reservations that America and Europe will achieve much faster growth rates from here. Why do you have that scepticism?

EN: The good news is that the global economy is growing- moderately, but growing. And we see that and we see that the global economic goal is less uneven that before. Many emerging markets are growing to developed countries. But I think for longer term perspective to have a higher rate of growth we need to resolve some structural bottle necks. They are different from country-to-country, but many counties met these challenges of aging population, of low productivity, of lack of incentives of investment, the threat of protectionism and every country has their own agenda of structural reforms and Russia has the same bottle necks that we need to overcome.

GC: Do you fear that given we have had very low interest rates in key economies for such a long time, now the fed is talking about hiking rates and even Mr Draghi is coming under pressure, that these economies will find it difficult to withstand higher rates from here?

EN: Yes we see this trend of normalisation of monetary policy in countries which are used to this unconventional, un-traditional policies. What is important to have the communication policy that will prevent from misunderstanding of markets and some shocks and we see that it happens in the United States this policy of very gradual normalisation I think markets understand this policy, they are prepared for the pace of this normalisation

GC: You have to prepare Russia and your Central Bank for any shocks that may come. Do you worry that when you look at US stock market valuations and the value of technology stocks in particular in America, that we could be heading into a fresh capital market crisis?

EN: We monitor all different shocks, different possible events in global markets that can effect Russian economy. But for us now, our economy depends on oil prices. This dependence is lowering but we depend on this and the main factor that can influence Russian economy is mostly the dynamic of the prices of commodities. But of course the second factor is the stability of financial markets as a whole. We are the part of this market and of course it's important.

GC: But is it something that you are currently worrying about?

EN: We are analysing this, we are not worried but we are analysing all these trends and were considering them as on one of the factors that can influence our monetary policy. But not so significantly, frankly speaking.

GC: So you have no real concerns that we are going to have any global economic slowdown? As a result of…

EN: In general, global economic growth supports Russian economy. Of course stronger global demand supports is positive for many countries. The second of course the strong economic growth supports the demand for our export goods. That's why it's important that global economy grow faster.

GC: We have recently seen in America, some congressmen under pressure because they own ETF's that have Russian stocks in them and some of those stocks have been companied that have been under sanctions. But it does seem to be part of an over-all paranoia around Russian assets right now. Is this on your radar screen at all at the central bank do you worry that is damages the image of Russian equities, Russian investable assets?

EN: In general not because we see now the big interest of foreign investors to Russian markets. You can see the inflow of capital to the Russian markets and many people even say about carry trade and excessive carry trade. We see some carry trade but we don't think that it presents some danger for the stability of Russian markets but in general we see more interest of foreign investors.

GC: So you don't worry about the politics in America.

EN: It's a pity to hear about this, it's strange but from a macro-economic point of view there is no problem with this kind of things… for now.

GC: Do you worry…

EN: No, no, no.

GC: I hear increasingly that there are plans underway to bring bitcoin into the light to approve it here in Russia. And perhaps make it a monetary asset…

EN: Digital assets, more digital assets than monetary assets.

GC: A digital asset that can be saved. Are you ready to authorise the existence of Bitcoin in Russia?

EN: We're analysing now this possibility and I think we should understand more about this internalisation of Bitcoin and our regulatory systems we see many risks on using Bitcoin. We don't consider that Bitcoin can be considered as a virtual currency. It's more digital assets with the regulation of assets. But I think it's more important to understand that benefits of new technologies. So like Blockchain which is on the basis of Bitcoin. Now Bitcoins is like money.

GC: Is there a time frame at all?

EN: We're not in a rush.

GC: You're not a in a rush. And is that because you have some doubts about it?

EN: We have some doubts, we don't see some huge benefits from introducing digital assets in our economy.