President Vladimir Putin has set ambitious growth targets for Russia but the country must not sacrifice macro-economic stability to get there, the central bank governor told CNBC.
"Our president has set us the objective whereby the Russian economy grows at rates above world levels, this means almost 4 percent," Elvira Nabiullina told CNBC's Geoff Cutmore.
"Of course this requires a rise in the potential growth rates. It requires structural reforms, in terms of labor productivity, private investment and then the economy can grow at higher rates than it is now," the governor said.
The central bank governor — who said that for 2018, 2019 and 2020 thereafter growth is expected to be in the 1.5 – 2 percent range — believes that Russia's economy has recovered.
"The Russian economy has pretty much emerged from recession and has recovered, reaching growth rates close to potential," she said, going on to state Putin's challenge to the central bank to promote higher growth.
But she cautioned that higher growth rates should be pursued alongside structural reforms in Russia, and that growth in itself should not be pursued at the expense of stability.
"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," she said.
"In other words, a rise in economic growth rates should not be to the detriment or at the expense of … macro-stability, low inflation, a well-balanced budget deficit," she said.
Achieving growth whilst maintaining stability was "within the abilities" of the new government, the governor said, adding that "naturally, the central bank will perform its part of the work in supporting macroeconomic stability."
Other central banks in the U.S., U.K., Japan and the euro zone have used quantitative easing programs — essentially increasing the money supply in order to stimulate economic activity. But that "cheap money," as it is also known, is now being wound down, leaving economists, investors and even central bankers wondering where a more "normalized" monetary policy will lead. Nabiullina said there were dangers to cheap money being used to boost the economy.
"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," she said.
"Therefore, I believe, the central bank believes, that high and stable economic growth rates may be on the basis of a combination of macroeconomic stability and structural reforms," she said.
Putin's desire for higher growth comes at a tricky time for Russia, both economically and politically.
Russia's economy is growing tentatively, the economy expanding 1.5 percent in 2017 after two previous years of recession, but the economy is still largely predicated on oil and gas exports. Russia learned the cost of its reliance on oil when the recession prompted by sanctions, capital outflows and a ruble rout was compounded by a prolonged slump in oil prices.
On the political front, Russia is something of a "persona non grata" in the West. Not only is is still subject to international sanctions for its illegal annexation of Crimea and its perceived role in a pro-Russian uprising in eastern Ukraine but its support for the rogue regime of Bashar Assad in Syria, its alleged responsibility for a nerve agent attack in the U.K. and suspected meddling in U.S. elections have not won it any friends either.
Domestically, however, things are looking up and Putin remains as popular as ever following his re-election in March to a fourth-term as president.
Ahead of the election, Putin pledged to boost welfare spending, create jobs and improve regional infrastructure, from roads to hospitals and affordable housing — but not much has been mentioned about funding such ambitious and costly promises.
There are also concerns that structural reforms could fall by the wayside — reforms that Nabiullina said were crucial.
"I think that structural reforms in Russia are possible, not to mention that they are essential," she said, adding that she expected the government to propose specific structural reforms by October.
Structural reforms (which essentially means changing the regulations and structures in an economy) that Russia needs range from an overhaul of its legal and administrative system to making the labor and product market more productive, flexible and efficient.