Elvira Nabiullina: joint meeting of State Duma

First of all, I would like to thank you for the great job you are doing to review the Bank of Russia’s Annual Report. This year, the number of meetings of working groups has increased, and they have considered all the issues very attentively. The dialogue with the Parliament is critical for us, especially during the period when the country’s economy and financial system are undergoing a structural transformation. Last year, the State Duma put a lot of effort to promptly approve the laws which helped the Bank of Russia implement its measures. I would like to thank the committees for this separately, for the joint work during this challenging period.

I would like to start out with how we responded at the beginning to the enactment of the sanctions in early 2022. The first and most large-scale sanctions were imposed exactly against the financial sector. This provoked a very high volatility in markets, and the ruble exchange rate started to plummet, just as stock indices, as you probably remember. Due to the blocking of a part of our reserves, we lost the opportunity for interventions to stabilise the foreign exchange market, as this is usually done in such a situation. Although the nature and scale of the shock were unique, the tools to protect the financial market and price stability that we had been developing for many years actually enabled us to quickly stabilise the situation and help the financial system weather this storm with minimum losses.

In order to calm down the foreign exchange market and prevent an uncontrollable acceleration of inflation, we raised the key rate to 20% per annum at once. Besides, we introduced capital controls to be able to influence foreign currency flows after the blocking of the reserves. The first restrictions were very tight. This was actually like fighting a fire. Nevertheless, these urgent radical measures helped prevent an inflationary spiral, quickly pass the peak of inflation and avoid the ruble depreciation that had always occurred during the previous severe crises, as you remember. We also suspended trading on the exchange in order to prevent a collapse in the securities market. We communicated with market participants to get prepared for the reopening of the market and were even ready to support the market of federal government bonds in order to prevent its downfall, but ultimately the market did without our intervention. The reopening of markets was quite calm, and considering the situation, they operate almost as normal.

The stabilisation of the exchange rate promoted the recovery of imports that had been strongly affected by the sanctions and disruptions in logistics chains in early spring. By the way, actually, the strengthening of the ruble in spring after its serious weakening was largely attributed to subdued imports as, at that moment, importers had not yet arranged new supply channels or found new suppliers and thus demonstrated low demand for foreign currency. Therefore, the ruble exchange rate was growing. However, I would like to emphasise that we only stabilised the market, without targeting any certain level of the exchange rate. It remains floating, balancing the interests of both importers and exporters. Hence, the situation with the strengthening of the exchange rate, followed by its slight weakening, is associated with the fact that the economy is searching for this balance itself.

A quick slowdown of price growth and improved expectations about the exchange rate enabled us to reduce the key rate faster than, for instance, after the 2014 crisis. The key rate of 20% per annum was kept for a little more than a month, and was cut to 7.5% already in September. This is two percentage points lower than before the February events.

I would like to dwell on the following. Indeed, we implemented anti-crisis measures that included the regulatory easing, in addition to the key rate increase and the capital controls. However, anti-crisis measures are a strong medicine, and, just as any strong medicine, they have their side effects. Hence, a patient should stop taking a medicine as soon as it becomes possible to do without it. Otherwise, these side effects will eliminate all advantages. This was exactly how we were acting. As soon as the situation stabilised, we started to ease the capital controls. Currently, it is still impossible to cancel them completely.

Many deputies asked us within the working groups whether we were concerned about an outflow of capital in these conditions after we had eased the capital controls. If we analyse the balance of the financial account — as everyone refers to these figures — I would like to stress that this is not an outflow of capital, not the money lost by the Russian economy. In the first place, this is a considerable portion of the foreign currency holdings kept by Russian companies and people abroad, including to purchase imported items and to service their foreign trade operations. This is because there are difficulties with international settlements, and a significant part of these funds is used exactly to pay for imported goods that the country needs so much.  Therefore, we believe that the capital controls should protect the economy against the pressure of the sanctions, while constraining external economic activity to the lowest possible extent. This is the balance we are seeking.

Currently, the key rate remains at the level of 7.5%. We have been keeping it unchanged for six months already. Furthermore, as you have probably noticed, annual inflation dropped below 4% in March and, possibly, will edge down even more in April. However, these low rates of annual inflation are mostly associated with the very low monthly price growth rates recorded last summer and autumn. Today, price growth rates remain moderate, but they are still higher than in summer and autumn. Making our decisions on monetary policy and the key rate, we take into account price growth rates observed at the moment, rather than last summer and autumn, and price growth rates expected in the next months.  We analyse inflation expectations and proinflationary risks. From this perspective, inflation trends are slightly more pronounced than in the second half of the previous year. This is explained by several factors. As regards external ones, the export is contained by the sanctions. The exchange rate that was strengthening last year and limiting inflation will probably have a proinflationary effect this year. Problems in the world economy and financial system are currently quite moderate. However, we could see how strongly markets responded to the problems of the two rather small US banks as these are demonstrative cases, although individual ones, signalling that the effect of policy rate increases after the epoch of very low rates in many countries can considerably slow down the world economy. This might decrease the demand for Russian exports and prices for energy commodities, and we should take this risk into account. We are closely analysing fiscal policy. This year, it will be making a positive contribution to both aggregate demand and money supply dynamics.  Consumer demand will depend on growth in household incomes and people’s readiness to use this money for consumption. We are monitoring these issues and will make our key rate decisions taking into account the overall effect of all these factors, both internal and external ones, in order to stabilise inflation close to 4% in 2024 and further on.

Now, I would like to speak on lending. Mortgage lending expanded by 20%. As such, this growth rate is quite adequate: this was not very fast, not an overheating, but this was certainly not as in 2021 when the increase was too fast, in our opinion, as mortgage lending then surged by 30%.  Of course, this was not a stagnation in mortgage lending, this was growth. However, there are some trends in the mortgage portfolio that we are concerned about, namely the so-called mortgages with a cashback and mortgages from the developer at 0%. These are actually marketing practices to conceal the overpricing of housing from borrowers and high-risk mortgages with a low down payment and overpriced collateral. Today, we are using all instruments and have made the relevant decision to stop these risky trends in mortgage lending. However, we can see that there are new schemes being constantly invented, and if this trend continues, we will need legislative decisions. We will ask for your help to terminate these practices that actually involve overburden for people who will have to pay for all this.

As regards corporate lending, it increased by 14.3% last year. This year, we expect it to expand by about 10%, which will correspond to the current situation because the growth of corporate lending last year was quite notable and even faster than in 2021. This was because companies were substituting their foreign borrowings.

Today, when the economy is undergoing a deep structural transformation, it will need a larger amount of financial resources. Accordingly, we should ensure that both banks and other financial institutions provide funding first of all for adaptation projects, transformation projects, and technological sovereignty projects and have access to both debt financing and equity financing.

Speaking of lending for such projects, we have a joint programme with the Government, as you probably know. The Government, within its competence, has developed the taxonomy of such top-priority projects. Having clear criteria for loans to finance these projects, we can significantly reduce the required loss provisions: the regulatory burden on banks’ capital related to these loans will be lower, which will encourage banks to provide resources for these projects in the first place.

In our opinion, the easing of such terms is totally right. These are not some extra risks for the banking system that could weaken its resilience. No.  We believe that the implementation of such projects will have a positive effect on the overall situation in the economy, borrowers’ financial position will become steadier, and the risks of failures to repay these loans will be lower, which will improve the resilience of banks themselves. I would like to reiterate, and this is a very important point, that jointly with the Government we have set certain criteria, rather than are selecting particular projects. These are clear criteria that banks can rely on. Banks know them and understand how to use them. We believe it important to avoid any bottlenecks in this area when decisions are made by a commission or a person in a certain agency. It is essential to finance specific projects. In other words, these are eligibility criteria for banks to make decisions on particular projects.

I would like to address another issue, but this is a longer-term task. We can see that bank lending has been dominating for many years as a source of funding for companies. However, this does not mean that such dominance is quite normal. We have very large opportunities for developing the securities market. As you know, the bond market is actively developing, but this is also borrowings, that is, loans and bonds are all borrowings. Besides, the bond market is currently accessible only for large corporates.  Our task is to make it accessible for small and medium-sized businesses as well, first of all technology companies engaged in such adaptation projects. In this area, we also have a joint roadmap with the Government to develop the regulation and create necessary conditions.

Nevertheless, we believe that, in addition to debt financing — loans and bonds, it is essential to focus more on raising equity capital, that is, on equity financing.

This is needed because debt in any situation is only an additional source for a company, but its development would be impossible without equity capital. Companies form their capital not only by reinvesting profits, but also by attracting new shareholders.  To this end, we need the capital market, and we have a large potential in this area. Compared to other countries, we have only 10% of shares that are now in free circulation, whereas this figure can reach 80% in many other economies. This means that they are actively attracting new investors. Of course, this is a huge task. It requires predictable conditions and disclosures. Therefore, we are also carrying out necessary work on these issues, together with the Government. We have a common understanding that the capital market should be developed. I would like to repeat once again that the Russian economy has a deficit of equity, rather than of debt financing. In this regard, we need additional measures to be taken.

Of course, it is crucial to create mechanisms for raising financing at various stages of companies’ life cycles — from start-ups and further on. This is a topic that has been discussed many times. By the way, there are legal decisions made in this regard. However, crowdfunding and venture capital financing are still not sufficiently effective now. For this, we have also prepared certain measures that would help incentivise the market.

Besides, I would like to say a few words about digital financial assets. This can be yet another instrument to raise investment. Currently, it is not used very actively, although the relevant laws have been adopted. In this regard, I would like to thank deputies. However, we will need to simplify the regulation in this market further to be able to attract more investors who are interested in digital assets. There are such investors, and we receive questions from these companies.

Digital assets are a very important topic. Speaking of technology development, as Mr Aksakov has already said, generally, our financial technologies are very advanced. The Russian financial sector is among the leaders in terms of technologies and remote services. Both banks and other financial institutions are developing their services in this area very actively and are improving them continuously.

Today, it is certainly critical to develop these technologies based on domestic solutions. As is commonly known, these technologies often used foreign solutions. This transformation is crucial.

In turn, we will develop all infrastructure projects that businesses need. You remember, as Mr Aksakov has said, that when we were launching Mir cards and the Financial Messaging System, indeed, many were then criticising us asking why we were doing this and spending resources when there were well-established international systems and were predicting that we would get worse results. It seemed then that these systems would never disconnect Russia and that it was highly unlikely, but it did happen. Many even said that the disconnection from the SWIFT could be a weapon in the economy and finance. However, these events occurred, and we can see that they have not disrupted financial transactions inside the country for individuals or businesses.

Thus, our investments in the domestic infrastructure have proven to be totally effective. Nevertheless, from the very beginning, we were building these systems in such a way as to ensure their interoperability with foreign partners if they are ready to work together. Currently, one of our top priorities is certainly the development of the system of international settlements. I would not discuss it in detail, but this is a really critical issue.

To finish off, I would like to mention another important topic. This is the last but not the least point. I am talking of the protection of financial consumers’ rights. Last year, the mechanism of loan repayment holidays was again highly demanded. Indeed, when incomes decline, people need a pause in loan repayments. Banks granted these holidays according to law and restructured loans under their own programmes. Mr Aksakov has already mentioned the figures.

Nonetheless, we are continuously monitoring this area to prevent any unfair practices, misselling, and hard selling of services. The number of complaints in this regard has decreased. We believe that one of the factors for this reduction is the powers that the State Duma provided to the Bank of Russia, that is, we are now entitled to suspend the sales of ‘bad’ products, I mean products that are ‘bad’ for consumers, and demand the sellers to buy them back. The opportunity to exercise these powers dampens the enthusiasm of some banks that cannot resist the temptation to make more money from people and continue to conceal fees and insurance not requested by consumers when issuing loans.

We consider it essential to approve the law on the effective interest rate, and in this regard we also hope for your support, as Mr Aksakov knows. A person should see the real amount of payments in a simple, clear and standard form, be aware how much the bank has added to the loan that the person is raising, and compare offerings from various banks, if there is a standard form, rather than their ads that can be very aggressive. In addition, we plan to extend the cooling-off period for people to be able to reject these products. This will also expand our opportunities for protecting consumers’ interests.

We have been discussing this draft law for quite a long time already, and it is clear that financial market participants are not very happy with it. However, we believe that our duty is to protect people’s rights as we can see that unfair practices are still used.

Winding up, I would like to say just a few words about the main result of the past period — we have managed to maintain macroeconomic stability, which is essential, financial and price stability, and the resilience of financial institutions. Moreover, financial institutions continued lending to the economy and they never stopped or reduced lending, in contrast to the previous crisis. Nor did they request any additional injections into the banking system from the Government. We have managed to secure the accessibility of financial services for households and businesses. To ensure sustainable and well-balanced economic growth in our country, we certainly still have a lot of work to do, but, in my opinion, we’ve got a good basis, a solid foundation. Together, we are able to do this.

Thank you! If you have any questions, my colleagues and I — my deputies supervising various areas are also here — would be glad to answer them.