Financial Markets: Increasing Complexity, Maintaining Stability

3–5 July 2019, ST. PETERSBURG

    Nabiullina Announced that the Russian Economy Structure Peaked Out

    Moscow. 4 July. INTERFAX.RU – The Russian economy, which grew by 0.5% only in the first quarter of 2019, hit its structural ceiling. Changes in monetary policy are a dangerous path to growth, says the Governor of the Central Bank of Russia Elvira Nabiullina.

    She noted that the economy is now growing at around 1.5–2% given a meagre unemployment rate. “And that is what we are going to see if we do not make structural changes, because the policy of supporting macroeconomic stability only allows us to stabilise the economy in line with its current capacity,” the head of the Central Bank explained.

    “If the Bank of Russia leverages its tools to boost potential growth rates, we, as a result, will eventually get to either inflation or financial bubbles, and most likely a combination of both,” warned Ms. Nabiullina.

    She said that the macro-stability achieved through targeting inflation and following the fiscal rule should not create an illusion of prosperity. is sluggish, businesses are not optimistic, household income is not rising in real terms, and “people do not feel that the economic stability is giving them a better quality of life,” she summed up.

    According to Ms. Nabiullina, the root of the problem lays in the structure of the Russian economy, rather than in the external conditions, which are now quite satisfactory.

    External situation is difficult but acceptable

    She agrees that global economic growth is slowing down, and trade wars and geopolitical tensions exacerbate the situation. According to her, there is no reason to expect any sweeping changes; central banks’ attempts to neutralize the perverse effects will follow the outbreaks ofpolitical populism and aggravations. The external context will remain challenging but not excessively bad.

    Improvement is only possible through structural reforms

    She believes that “only through structural changes, we are to unlock the power of the economy to gain growth momentum and, ultimately, to turn around the fortunes of the nation”. In turn, such changes will lead to the redistribution of labour and financial resources to industries “generating greater added value and performance”.

    First of all, Ms. Nabiullina believes that the investment climate needs drastic improvements.

    “We need to create incentives for entrepreneurial initiative. Business spurs economic growth, not the state. Public investment cannot replace private funding. So even with successful state-related national projects, there is no guarantee that they will generate a proportionate multiplicative effect through amplified private investment. Besides, it is important to emphasize that private investment is not a low-interest loan from banks with state guarantees. Private investment is primarily an additional shareholder capital, own funds of both large business and small entrepreneurs, with which they are willing to take risks betting on the future growth of their business and profits. So the willingness to take this risk directly depends on the notorious investment climate,” she said.

    “If an efficient business is not ready to invest, and the demand for attracting financial resources is only for companies in a weak financial situation which they need for survival and not for development, then one should not be surprised that the financial sector is reluctant to lend to companies,” noted the Governor of the Bank of Russia.

    She warned that structural change takes time. “First, because of high oil prices, then due to the need to focus on strengthening macroeconomic stability, we were postponing the implementation of many urgent structural reforms, and now we want a quick result. As a result, we again find ourselves trapped in the “search for simple fixes”, looking where convenient (not where we should, – IF). So for some reason, this approach brings every search mission to the Bank of Russia,” she complained.

    There are no simple solutions

    The Governor of the Bank of Russia stated that there are no simple solutions. If the investment climate is the one constraint, then no matter how other factors change, the situation shall remain the same, she added.

    “Moreover, what a waste of time to disguise structural problems by giving out cheap money. Hard-won macroeconomic stability will be the first to go, and then we’ll chase after it once again, finally undermining the people’s and business’ faith in the day to come,” she cautioned.

    According to Ms. Nabiullina, “the improvement of the investment climate, alas, cannot be reduced to lowering administrative barriers”. “We need the protection of private property, independent courts and in court settlement of corporate conflicts, a better quality of corporate management, and human development. We keep repeating this over and over again through the years. At first, this seemed right, then it was a common ground, then turning to the topic of investment the climate seemed like windbaggery, and now it sounds like a desperate outcry. However, we still need a better quality of the business environment, and this is a grind,” said the Governor of the Bank of Russia.

    These statements Ms. Nabiullina made against the background of on-going public debate with the Ministry of Economic Development, which claims that one of the fundamental problems is an upsurge of consumer lending and lack of banks’ interest in financing the corporate sector and urges the regulator to intervene.