Below is the transcript of a CNBC interview with the Central Bank of Russia's Governor, Elvira Nabiullina, and CNBC's Geoff Cutmore.
GC: Governor, I wanted to start by getting an updated view from you on how you think the Russian economy is doing right now. It seems like it's been a relatively strong start to the year, are you feeling confident that this resilience will continue through the rest of 2018?
EN: The Russian economy has entered stable, if not considerable rates of growth. The last year showed a growth of 1.5%. Our estimate for 2018 and for 2019 and 2020 thereafter is in the 1.5 – 2% range. Perhaps you recall that we estimated the potential growth rate at this level. The Russian economy has pretty much emerged from recession and has recovered, reaching growth rates close to potential.
It is growing in accordance with our baseline forecast but our President has set us the objective whereby the Russian economy grows at rates above world levels. This means almost 4%. Of course this requires a rise in the potential growth rates. It requires structural reforms, in terms of labour productivity, private investment and then the economy can grow at higher rates than it is now.
GC: The problem is, as you have pointed out over and over again, without serious institutional reform, we're not going to achieve those higher growth rates here. Do you think that there was perhaps a missed opportunity in reappointing many of the same figures to the government that have been in position previously and have not really pursued the kind of structural reform that this economy needs?
EN: I think that structural reforms in Russia are possible, not to mention that they are essential. And it is expected that the government will propose specific measures by the autumn, by October, so as to achieve higher growth rates in economic growth and to increase prosperity. But I would like to stress that it is very important, including from the standpoint of the Central Bank, that structural reforms of this kind should go together with macroeconomic stability.
In other words, a rise in economic growth rates should not be to the detriment or at the expense of…on the basis of macro-stability, low inflation, a well-balanced budget deficit. And I think that this is within the abilities of the new government. Naturally, the Central Bank will perform its part of the work in supporting macroeconomic stability.
GC: So, you are comfortable, though, with the idea that you sacrifice higher growth for stability. So, stability is something you would prefer at the expense of slower growth?
EN: I think this is the wrong impression of macro-stability and high, sustainable growth rates. I believe that high, sustainable growth rates can only be possible on the basis of macro-stability…because, if cheap money, as some have suggested, is used in an attempt to stimulate higher growth rates at the same time as the economy is already growing close to potential rates, this could only lead to an overheating, to a short-lived spike in economic growth and then it could fall back once more, and we have seen this with certain countries so, therefore, I believe, the Central Bank believes that it is high and stable economic growth rates may be on the basis of a combination of macroeconomic stability and structural reforms.
GC: The bank has been on an easing bias and yet I think that the market was disappointed in April that you didn't cut rates again. Can you confirm that you are still in an easing bias and that if stability returns to the rouble rate and the capital markets and you are comfortable with the inflation outlook that rates are going to go down from here?
EN: Certainly, our monetary policy is one that we define as moderately tight and this year we intend to transition to a neutral monetary policy. Our assessment of a neutral key rate is 6-7%. We are currently just a little bit over this rate. Nevertheless, in our policy of a transition to a neutral rate, we will of course be selecting both a speed of transition and the time of transition taking into account various kinds of risks and various kinds of factors that may have a considerable impact on our inflation forecast and our economic outlook. These factors include primarily external factors, the consequences of normalising the monetary policy, first and foremost in the United States, which may strengthen the dollar and weaken currencies of emerging markets.
It goes without saying that we are taking into account geopolitical risks although I have to say that the Russian economy and the Russian financial system have adapted pretty quickly to the latest wave of economic sanctions because despite that spike in volatility in the financial indicators that lasted some ten days to two weeks, those financial indicators have now fairly quickly reached an equilibrium and have stabilised. Another factor, of course, that we are taking into consideration in our monetary policy is the future fiscal policy. The government will evidently announce the measures that will enable the financing of additional budget expenditure. We will have to assess all risks in determining what the structure of these measures will be.
So, if we are talking in broad terms, then of course we do have some room for reducing rates but the time and the rate of reduction in rates will need to be looked at separately at our board of directors.
GC: It appeared in April that you didn't cut because of the sanctions and you were waiting to see what the ramifications would be on the rouble and on inflation. Is it fair to say then, that Russians are having to pay higher interest rates on their loans because of Donald Trump?
EN: When we took the decision the last time at the meeting of the board of directors, we indeed decided to keep the rate as it was. We took various factors into account, including geopolitical factors, as I have mentioned, and the higher volatility on the international financial markets, linked, as I have also already mentioned, with the policy…the normalisation of U.S. monetary policy
Incidentally, we have seen that the expectations of investors as regards the effects of the normalisation were also subject to volatility and, irrespective of the sanctions, these spikes and volatility are evident on the international financial markets. We took this factor into account too. We also took internal factors into account. So, this is a complex of decisions; a complex of factors that we are taking into consideration.
Nevertheless, the relaxation in the monetary policy that has taken place in previous months is already……and allow me to remind you again that we are extremely close to the level we believe is neutral.
This reduction has already enabled us to reduce lending rates in the economy and we can see that lending in the economy is recovering and growing at fairly rapid rates. This applies first of all to retail lending and also lending in the corporate sector.
And it is growing at rates above GDP so we believe these growth rates are wholly healthy and the current availability of financial resources is fully adequate for the rates of development and the level of economic development that we are seeing.
GC: So, fair to say, then, that you actually are pleasantly surprised that the sanctions are having very little impact?
EN: Not that surprised because there are in-built stabilisers in the economy and if we were to report dating back from 2014, then the economy has indeed become more stable in the face of various kinds of shocks from outside. Be that the fall…the significant change in oil prices or the sanctions, the floating exchange rate, the tough budget rules enable us to absorb these outside shocks and indeed, regardless of the short-term volatility of many factors which is generated by the need for market players to adapt to new events and to assess and understand them but on the whole the financial markets quickly find new equilibrium and we see that the sensitivity of many of our indicators to external factors has decreased. For example, the sensitivity of the currency exchange rate to oil prices. In 2014 it and elasticity almost reached a single point. Meaning as the oil price changed this had an almost instant impact on the currency rate. The pass-through is now down from 1 to [0.16] according to our estimate. This is a significant reduction in the sensitivity to oil prices. The same goes for other parameters.
So, we are seeing the economy becoming indeed more stable. Diversification of the economy can give even more stability, as can structural reforms, which will make it even less sensitive to such external shocks. This doesn't mean we have to be laid-back in the face of various kinds of risks we have all the tools in place which we tested in 2014 and which we can implement in any situation.
GC: We've often talked about the currency and your comfort level with the way the currency has behaved. Have you been satisfied that the range within which it has moved over the last few weeks, post the fresh round of sanctions, has been within the realm of your expectations, no dramas?
EN: We moved to a floating exchange rate and have been maintaining this policy for several years now and in our monetary policy, in decision making on the interest rate, we take into account that the rate fluctuates.
Yes, the last wave of sanctions led to a weakening of the exchange rate; we estimate this to be around 7%. However, we see that in addition to the reduction in dependency of the exchange rate, especially on oil prices, we also see a reduction in the dependency of inflation on the exchange rate
Therefore, the transfer coefficient that is normally applied – the transfer coefficient of the exchange rate on inflation – it has halved, according to our assessments and, in practice, we see, over the last week, that the weakening in the exchange rate has had a fairly weak impact on current inflation.
Of course, there will be some impact, but it will be spread over time.
GC: We see this American administration using a much more muscular, financial foreign policy and around Iran there have been all sorts of threats about companies not having access to the SWIFT system. Is this something that you are concerned about and have you made arrangements for Russian companies to be able to find other ways through the monetary system if SWIFT access is denied?
EN: We take all these risks into account. We fully understand that we are living in conditions where uncertainty has increased…and there are risks in using the global financial networks, the global financial system, of which Russia is a part.
Therefore, since back in 2014, we have been developing our own systems, including a payments system. Inside Russia we have created a system for transferring financial data, which is similar to SWIFT. This reduces the risks for Russian players, for Russian businesses and for Russian banks.
We are creating our own ratings companies because there came a time when ratings of some Russian companies were withdrawn. So we are making certain elements that were missing in the Russian financial system and in the Russian infrastructure.
Of course, though, it would be far more effective to have an international system on which everyone could rely, which would be distinguished by predictability and an inviolability to the rules and access to them, as this is, after all, a financial, economic system. Russia has encountered this and so, proceeding from this, we are taking measures that reduce the risks for the Russian economy and the Russian financial system.
GC: So, is that system ready to go live and it's just a question of flicking a switch if you're denied access to SWIFT?
EN: This system is already operational and it allows, inside Russia, to transfer financial data. Specifically, inside Russia, the Russian Federation. Because SWIFT is not only used in transboundary operations but has been used inside Russia as, I think, in many other countries. But we have created an absolutely similar, competing system which allows, at the very least, inside Russia, to nullify such risks.
GC: You talked about risks and I know that you've mentioned several times your close attention to what's happened with U.S. interest rates and the strength of the dollar but are you also now watching developments in Italy very closely as it appears there may be a government forming that is unwilling to stick to the current EU rules around debt. Do you think there could be some challenges coming from Western Europe?
EN: On the whole, we see that the European economy is showing good growth rates and this is in different regions and not only in certain countries. In our baseline scenario we proceed from the fact that we will not see any particularly large risks from the European Union and the economies of individual countries, influencing the situation in the Russian economy and the Russian financial system. At the least that is our outlook.
GC: Governor, thank you very much indeed for taking the questions.
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