Russian Central Bank: The System Is Stable

IMF News, December 5, 2017

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Russia recently rebounded from a two-year recession caused primarily by sanctions and a steep drop in oil prices.
Growth prospects over the next five years look rather low at 1.5 percent, primarily because private investment in sectors other than oil and gas remains limited.
The output gap is closing and the economy is getting close to equilibrium.

Bank of Russia introduced Basel III regulations and substantially improved supervision to support medium- and long-term growth.
Objectives for the financial sector:
- A financial sector with healthy banks only, leading to increased competition and greater availability of financial resources for the real sector.
- Improved sustainability of pension funds and insurance companies to provide long-term resources for companies and people.
- Development of financial infrastructure and domestic bond and equity markets.
Consumer protection and financial literacy initiatives:
- An extensive consumer literacy program for different groups of consumers.
- A new website and a textbook on financial literacy for teachers, written together with the Ministry of Finance.
- Considering integrating a selection of mathematical tasks on financial issues into basic textbooks to teach children financial literacy through math classes.

Overall assessment: "the system is stable."
Recent turbulent period: bad loans increased, and profits and credit growth slowed down; this period appears to have come to an end as the economy and the banking sector are getting healthier.
Measures to address nonperforming loans and weak institutions:
- Liquidate or rehabilitate so-called “zombie” banks, which are highly indebted and incur persistent losses; such banks do not finance growth.
- "Over the last four years, we removed some 350 banks from the market."
- Close banks involved in money laundering and address private bank owners using banks to finance their businesses or banks with bad business strategies that are insolvent despite superficially correct books.
Expected outcome: greater trust in a healthier banking sector that takes on a bigger role in financing growth.

Key figures:
- The central bank’s key interest rate is the lowest since 2014, and at 3 percent, inflation has fallen below the Bank’s target.
Inflation dynamics:
- Decline in inflation was partially explained by one-off factors, such as real exchange rate appreciation and a decline in food prices due to large crops.
- Inflation expectations remain high, leading the Bank to decrease interest rates slowly.
Impact on growth:
- High interest rates do not seem to have had a significant negative effect; macroeconomic stability appears to have helped revive growth and compensated for the negative effects of tight policy.
- The Bank does not expect growth to speed up significantly when interest rates go down; growth may even stabilize at a somewhat lower level.
- Structural reforms (improvements in the investment climate and infrastructure) are necessary to achieve a higher potential growth rate.

Russia remains a member country of the IMF and helps finance some lending programs.
Current interactions with the IMF focus on technical assistance and consultations, including joint work on financial inclusion and pension reform.
The Bank values the expertise of international financial institutions and seeks to learn from the accumulative experiences of other countries during ongoing economic changes.

Source: IMF News — Russian Central Bank: The System Is Stable, December 5, 2017