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Priorities for the Central Bank of Russia

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Priorities for the Central Bank of Russia Reinvigorating Growth Potential: Priorities for the Central Bank of Russia Professor and Head of International Organizations Research Institute, Higher School Marina Larionova of Economics, National Research University Researcher, Global Governance Research Center, International Organizations Andrey Shelepov Research Institute, Higher School of Economics, National Research University he pace of global recovery remains weak. More advocate different approaches. Some experts and than twelve months since the G-20 summit in certain authorities propose that the CBR should TLos Cabos, G-20 members are laboring their explicitly prioritize support for economic growth way towards “Strong, Sustainable and Balanced in its policy, stimulating the real sector of the econ- Growth” in a clouded world economic outlook, omy using all the instruments and resources it has. with the eurozone in a state of recession, a combi- These include lowering interest rates, depreciating nation of policy stalemate and across the board fis- the ruble, expanding refinancing instruments, and cal consolidation constraining growth in the U.S., slowing down financial supervision reform by de- and emerging markets and developing countries laying the adoption of Basel 2.5 and Basel III capital experiencing a clear slowdown compared to their frameworks. According to the competing second rapid pre-crisis expansion.1 A durable recovery that school of thought, the CBR should focus on infla- creates good jobs, which G-20 leaders agreed to co- tion targeting, consolidate its liquidity instruments, operate for in September 2009, proves to be an elu- raise flexibility of the ruble exchange rate with lim- sive objective. Fiscal consolidation acts as a drag on ited interventions to soften short-term fluctua- economic recovery and the G-20’s capacity to de- tions, strengthen the supervisory framework and liver on the growth and jobs agenda is questioned build a reliable, stress-resistant financial markets by its citizens. This calls for the G-20 members’ infrastructure. commitment to a balanced and coordinated mix of policies and instruments, reflective of the state of Proponents of the first approach claim that in times their economies, which would gradually strength- of weak economic growth, measures to stimulate en economic growth and promote macroeconomic economic activity should be a priority. According stability. Responding to global and domestic priori- to this approach, central banks should bear re- ties, Russia has placed growth and jobs at the core sponsibility not only for purely monetary policies, of the G-20 agenda2 within the fundamental ques- but for implementing other growth-oriented poli- tion of what should be the main macroeconomic cies as well. Special measures could include pro- and financial policy requirements for growth. viding financial support to large scale investment projects using excess reserves. Central banks us- Growth prospects for Russia are projected at 2.5 ing this approach keep interest rates at a low level percent in 2013 and 3.25 percent in 2014, a down- by buying government bonds. During the global grade from the targeted 5 percent.3 In this context, financial crisis and its aftermath, with short-term a domestic debate is unfolding on what instru- interest rates in major advanced economies close ments can be most effective for unleashing the to zero, their central banks started buying instru- growth potential. At the front and center of the ments with longer maturity than short-term gov- debate is the course of monetary and fiscal poli- ernment bonds, thus increasing the monetary cies, financial regulation and structural reforms, base. The rationale for this policy is that given low as well as the role of the Central Bank of Russia interest rates which cannot be further decreased, (CBR), soon to acquire the functions of a mega- an increase in the monetary base remains the last supervisor. There are two schools of thought which available source for stimulating economic growth.4 THINK TANK 20: The G-20 and Central Banks in the New World of Unconventional Monetary Policy 73 However, this is not the case for Russia, where the of loans secured by non-marketable assets and refinancing rate currently equals 8.25 percent.5 guarantees for 12 month terms, thus expanding the set of available monetary policy instruments.10 Another growth-stimulating factor within this Resisting the call to devalue the national currency strategy is currency devaluation. Increased money to help export-oriented, mostly extractive indus- supply associated with quantitative easing leads tries, the CBR is pursuing a managed floating ex- to national currency depreciation, which benefits change rate regime,11 protecting the economy from domestic export-oriented industries and import speculative capital flows and allowing companies substitutes. Some experts claim that this effect can to adapt their expenditures in periods of abrupt be further strengthened by central banks mea- exchange rate fluctuations by currency interven- sures such as direct interventions in the currency tions. According to CBR data, its foreign exchange markets. Control over inflation under this line of interventions amounted to $4.3 billion and €382 defense is not a priority as most countries which million in the first half of 2013, which is a signifi- resort to these instruments have low inflation. This cant change in pattern compared to 2012 interven- policy is believed to have helped reduce systemic tions of $15.2 billion and €1.1 billion over an equal risks and strengthen trust in the G-7 countries’ fi- period.12 By 2015, the CBR intends to fully switch nancial markets.6 While there are different views to a floating exchange rate by gradually increas- on the relationship between quantitative easing ing exchange rate flexibility. Thus, its currency and inflation, the risk of higher inflation, espe- interventions to influence the short-term ruble ex- cially during an exit from such a policy, should change rate dynamics will be terminated.13 not be underestimated. For Russia, where the in- flation target for 2013 is within the range of 5 to 6 Effective financial regulation and supervision is percent,7 further increases would mean enhanced regarded as a cornerstone of ensuring financial investments risks, higher nominal interest rates, stability and growth. As a response to the crisis, lower predictability and shorter planning hori- G-20 member governments have launched re- zons, as well as a decline in business and consumer forms aimed to strengthen control over financial confidence. markets, expand the coverage of the regulatory system to include new financial products and ad- CBR’s monetary policy is guided by the second ap- dress systemic risks to prevent future crises. To proach, though there has been pressure to recon- make financial market reforms more effective and sider the strategy, especially after recent growth comprehensive, the Russian authorities proposed projections and a change of the CBR Governor. a concept of establishing a mega-supervisor re- To manage inflation expectations, the CBR pur- sponsible for the supervision of both banks and sues the adoption of formal inflation targeting to non-banking entities. In January 2013, this idea cut inflation down to 3-4 percent over the 2013- was supported by the President,14 and in July 2013, 2015 time horizon, a trajectory which is estimated the draft law on a potential mega-regulator was ad- not to undermine growth prospects.8 To enhance opted by the State Duma.15 The law provides for a transparency and efficiency, the CBR has shifted gradual take-over of the Federal Financial Markets its focus from currency interventions to bank re- Service functions, currently responsible for regu- financing,9 expanding the set of instruments and lating the non-banking financial sector (insurance optimizing interest rates on different types/dura- companies, pension and investment funds, ex- tions of operations and retaining the one-day auc- changes etc.), to the central bank. The creation of tion repo rate at 5.5 percent, below inflation. A case a mega-supervisor aims to ensure effective control in point is the decision of the CBR Board of Direc- and oversight across the entire Russian banking tors in June. For the first time in its recent history, and financial sector. The new authority, expected the central bank set the minimum floating interest to be fully operational by September 2013,16 will be rate of 5.75 percent on the auctions for provisions combining traditional monetary functions of the THINK TANK 20: The G-20 and Central Banks in the New World of Unconventional Monetary Policy 74 central bank with the overall financial markets su- Indeed, the new growth model can only be based pervision, thus avoiding inconsistencies between on stable macroeconomic conditions, more effi- the two policy area objectives. cient use of resources, long-term investment and a sound financial sector. These ingredients will help The CBR has begun implementing internationally- implement the much-needed structural reforms agreed financial sector reforms proposed mainly where progress remains subdued. A historically by the Financial Stability Board (FSB), including low unemployment level and a narrow output gap new banking capital and liquidity standards, sound imply that Russia may face constraints in eco- compensation practices and systemically impor- nomic growth if no actions are taken to stimulate tant financial institution resolution regimes. Simi- investment
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