- Latest Russian central bank paper calls for economic change
- Central bank sees itself as a guarantor of macro stability
- Russian annual inflation target set at 4%
Moscow looks ahead: The latest report from Russia's central bank shows an institution with a great many big plans and a few looming blind spots. Photo: iStock
By Nadia Kazakova
The Russian central bank just published its updated monetary policy report for 2017-2019. Despite its length, the paper is worth reading. The authors have made an effort to explain in plain Russian what the central bank has been doing and why.
All in all, a good remedial read for lapsed economics students.
From the very start, the central bank document reads more like a party manifesto than a monetary policy document. In the first sentence it says that there is a need for a change in the Russian economic development model. The country must move to an investment model centred on economic growth and away from a commodity exports-led economy, which exhausted its potential years ago.
The central bank sees its role in making the transition by taking annual inflation down to 4% (not much lower due to structural reasons) by keeping positive and stable real rates to protect savings against inflation and to keep the savings rate at a high level).
The central bank also sees itself as being an all-around force for macro stability as the bank believes its monetary policy is more or less the only stabilising force afoot in the Russian economy at the moment.
Central bank of Russia's macro projections for 2017-2019, % y/y:
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In practical terms, it means that the nominal rates would remain at the current 10% level until at least the start of 2017 (i.e. the market might have to wait well into the new year for a rate cut) and monetary conditions will remain tight (higher reserve requirements for banks, tougher rules on collateral, etc).
The bank says that softer monetary policy could only be expected by around mid-2018 when inflation is closer to its target of 4% (under the base-case scenario of $40/barrel Urals oil). If the oil price disappoints (and drops to $25/b), the central bank would keep tighter monetary conditions for longer; this would be an effort to keep rouble assets attractive, claims the paper.
Under the central bank's base scenario, macro stability (low inflation, positive real rates) would lead to an orderly process of increased investments wherein money from happy savers would be invested by well-regulated banks into projects led by uncorrupt, benign and forward-looking private-state partnerships.
High real rates would mean that companies would borrow less (the level of corporate debt is already high, in the bank's view); instead they would cut costs, increase efficiencies ,and re-invest.
There is a retort to proponents of the alternative policy of massive monetary stimulus, negative real rates and massive state-directed investments. In short, the riposte claims that negative rates will devalue savings, resulting high inflation will hit the poorest hardest, and centralised investments at negative rates are bound to be wasteful.
It is not as if the central bank does not see any problems. The paper points to the limitations of monetary policy in an economy with severe structural deficiencies (monopolisation, widening income gap, poor transmission mechanism from savings to investments in the banking sector, among others).
It is also interesting that the bank sees a problem with the Russian middle-class investing its savings in assets outside Russia, such as foreign real estate, FX bank accounts, and luxuries. Of course, the central bank (and the government) has been making it increasingly difficult for those with savings to engage in such unpatriotic indulgences.
(In our view, the authorities would have been better off analysing why the Russian middle-class do not want to invest in Russia!)
There are a couple of reasons, however, why the central bank's recipe for Russia's economic transition might not work as intended...
Firstly, tight monetary policy well into 2018 and high real rates will inevitably lead to inflow of hot money into the Russian rouble market. Given that the central bank is actively discouraging residents to buy FX, it could lead to upward pressure on the rouble.
Secondly, the only two competitive sectors of the Russian economy – exporters and local producers of cheap consumer goods – are unlikely to welcome either a strong rouble or high real rates. It is unclear who would invest outside those two sectors, given the structural and infrastructural problems.
If Russian households' rouble savings are to be spent on white elephant infrastructure projects, it might lead to a bit of growth in the next couple of years, but it will also result in a collapse of investments elsewhere and a return of high inflation. Households might be better off holding their savings in dollars under the proverbial mattress rather than see their money disappear through inevitable inflation as bad debts (along with budget deficits) are monetised.
The central bank does make some concessions to those worried about a too-strong rouble. The bank might soften monetary policy and will start buying FX in the open market if the Urals oil price rises towards $55/b, says the report. Under this positive scenario, the central bank would want to increase its reserves to $500 billion (from $396bn currently).
All in all, the central bank report would cheer those who might bet on a stronger rouble within a 12-month horizon. For those with a longer-term outlook (especially equity investors), however, there is much less on offer.
There is a rising risk of stagflation and lower economic growth along with margin pressure on exporters and consumer companies.
The impact of oil price movements also remains a significant dark-horse factor. Photo: iStock
— Edited by Michael McKenna
is a specialist on Russia, particularly the oil and gas sector