Until now trading
hard currency and attracting money on rouble deposits
were the two tools the bank was using, but you have
been looking at widening the number of instruments.
How will you be doing this and what are the major
instruments you will be using?
It is a complicated story because Russia had
a very strong balance of payments after the 1998
crisis. There were many reasons for this and one
of them was the exchange rate policy as the Central
Bank and the Government are not in favour of a
fast appreciation of the national currency. The
Government's point of view is that a fast appreciation
is not appropriate for Russian companies as it
will lead to increased competition. This is the
general idea, which is supported by Mr. Ilarionov,
the Economic Advisor of the President.
At the Central Bank, we have another point of
view and believe that a strong balance of payment
can be good for many countries, especially for
those, which are tightly connected with international
trade and global economic growth. Export makes
up for 30% of Russian GDP and the growth rate
of our GDP is tightly connected with export opportunities.
A growing international demand for oil, gas and
metals will lead to a higher domestic growth rate.
A deep international recession may bring a very
low growth rate or even a recession within the
Russian economy. The balance of payment is an
instrument, which can save the country in case
of an external shock, and this is why we are in
favour of a strong balance of payment. We therefore
have to prevent a fast appreciation of our currency.
However, it is very well known in economic theory
that it is only possible to keep a strong balance
of payment for a longer term without inflation
if the budget is in a position to absorb some
excessive funds. If this is not the case, then
the result will be a higher inflation rate and
a free appreciation of the currency. I am afraid
that the government still does not understand
this problem well because the 2003 budget is very
tight. From a point of view of the monetary policy,
it means that the budget policy will be weakening
because as a result the budget will not be in
a position to absorb all the commitments.
The choice will be very limited: either a higher
inflation rate or an appreciation of the rouble
in order to make the balance of payments easier.
The threat from external shocks will then be growing
and I believe this to be a risky policy. If we
are lucky to see stronger growth in the United
States, an end of the problems faced by the stock
markets and strong growth on our domestic market,
then the situation will be positive. In this case,
we will be in a comfortable position, the budget
will be executed and there will not be any problem
with inflation. However, if there are serious
problems in the world economy and a recession
in the United States, meaning a GDP of minus one,
the situation will be negative for Russia. The
best policy would be to have a cushion and some
security against external shocks, but the government
may instead chose a more risky policy.
Our exchange rate policy will be completely dependent
on the budget policy. If budget policy is not
so tight as we supposed than there will be further
appreciation and step by step normalisation of
the balance of payment from the point of view
of …Especially taking into account some opportunities
that in case of favourable situation will bring
to the reduction of net capital outflow from Russia
and further result will be some arguments in favour
of strong balance of payment. So we have to make
the right situation. Of course the best situation
is strong budget, capital inflow and appreciation
of national currency because of capital inflow
especially FDI, because in this case we will be
under the guarantee of competitiveness of the
industrial sector, it will grow because FDI is
the source for its growth. FDI is not just money
from foreign companies, it maybe the money from
Russian companies that are just offshores. For
us it is absolutely neutral if it is the capital
inflow. And of course it is the private capital
inflow and private capital is much more effective
state capital. And if we see capital inflow especially
in the form of direct investments than of course
competition will grow as well. In this case we
are ready to support, we can see that appreciation
of rouble is an absolutely normal process, Russia
is safe on this side.
Speaking about private capital inflow and
especially FDI, what are you doing to attract
more foreign investors and foreign capital into
Russia?
We have to keep in mind that Russia is still
in a transition and we therefore have to maintain
a healthy monetary policy to ensure the stability
of the exchange rate, which should not be fixed,
but it should be predictable. There are therefore
quite high real interest rates in the economy.
History shows that all countries whose transition
has been successfully completed, had a specific
period of high real interest rates. This is very
useful in order to start attracting capital.
How can you bring more confidence in the currency
especially for foreign investors. This maybe even
is the crucial issue.
Confidence does not just depend on the central
bank. Because the confidence in the national currency
does not just depend on the right policy of the
Central Bank, but on the health of the economy
as a whole, healthy industrial sector, because
there is investment, there is business activity,
there is more or less liberal economic rules,
etc. Then of course confidence will grow. And
the Central Bank is in charge of tuning monetary
policy, exchange rate policy, interest policy,
according this process.
You spoke before appreciation of the rouble.
What do you think would be the ideal level of
the rouble versus the dollar or euro. What are
trying to influence it?
Our target is not changing rate level. We have
a floating policy. As I said for a few years already
the target has been to keep appreciation in some
limits, not identified, but some reasonable reasons,
which from the political point of view was acceptable.
Which means it did not arouse serious protest
in different parts of the society. It was a reasonable
policy because there was some agreement. Of course
we are going to keep the same floating exchange
rate regime. Because, again, balance of payments
of the Russian economy strongly depends on the
world economy. In this case floating exchange
rate is more appropriate, it is possible to compensate
partially, not by 100% , external shocks through
the exchange rate policy. And from this point
of view we have to continue this policy but to
pay more attention to the monetary instruments
because previously exchange rate was a completely
anchor to the economy. Actually in reality it
was a currency board regime, but without confidence,
because as you know all the money emitted in the
country was due to FOREX operations, it is typically
a currency Board regime. You have national money
which is equal to currency inflow or outflow.
But exchange rate was not fixed officially and
this is why it was a policy without confidence.
We are not supposed to continue this policy. Our
idea is to shift step by step from the exchange
rate as an anchor and it is not the question of
one year, it is a question of several years to
the policy which would be based on the monetary
operations that the Central Bank will have in
the market. But we are going to provide financial
and monetary market with typical for many Central
bank operations. More precisely at this moment
we are considering a very simple approach - very
soon we will be ready to provide the financial
markets in two or three months' time from now
with deposit operations or REPO operations in
order to attract some liquidity away from the
financial market, because usually in our country
in the beginning of the month banking sector has
excessive liquidity because of the specific activity
of the budget. Usually in the beginning of every
month there is a lot of money on the budget sector
and immediately you can see a lot of liquidity
. We are ready to give some instruments to the
commercial banks, to attract this liquidity for
a couple of months: from the reverse repo operation
to deposit operations on the market basis, that
is options, deposit options. But we are ready
to guarantee to the commercial banks within a
month every day some refinancing operations. We
are ready to provide commercial banks with short
term liquidity for 1 to 7 days which will be based
on direct repo operations or in form of Lombard
credits. It is just the question of choice. In
this case commercial banks will be in opposition
to regulate liquidity more efficiently. And the
interest rate of the Central bank will be playing
a much more significant role because commercial
banks will be given this market rate for three
months for example and fixed rate of the Central
bank, it will be our dictate for a short term,
1 to 7 days, maybe two weeks. Of course this short
term interest rates will be connected with these
market interest rates for … operations. It
is not a new thing, some Central banks in Europe
apply this, if I am not mistaken ECB as well.
But it will be very useful for banks, we have
met with some leading banks in Russia recently
and we discovered with them this approach, they
say it could be reasonable and they are ready
to participate in such a scheme. And it will be
reasonable because it will be possible to register
duet liquidity between banks, you know that in
Russia interbank money market is not very developed.
For example Sberbank, which is the biggest Russian
state savings bank has quite substantial liquidity
but they would not like to sell this liquidity
in the market because I think it is the problem
of confidence first of all. We are ready to be
intermediary, we are ready to take Sberbank's
money on our deposits in exchange of say state
bonds. So state bonds will be given to Sberbank,
money will be on our account. When we have this
money, we are ready to finance other banks through
a lombard credits for example, which are supposed
to have a guarantee, in form of security, their
bonds. Sberbank will be in the position to sell
these bonds in some cases which was given to us
in order to increase liquidity, it will be a more
flexible instrument and liquidity will be spread
between commercial banks. As bankers said and
we understand it perfectly well, this policy will
be very useful in order to create the opportunity
for banks to create long money. Because now the
situation moves banks to give only short term
market rates, this way it will much easier for
banks to issue long term credits. It is actually
a very simple approach.
And I hope that step by step this policy will
be successful, it will be enough to reduce this
excessive attention which all country's financial
markets pay to exchange rate. It is not easy,
but exchange rate is now the centre of any business
and money decisions. I think that it is time to
change the situation the situation because today
it is much better than it used to be, economy
is growing, budget in any case is much healthier
than before.
Of course we have a dream to have even healthier
budget. But you know every time we need more than
we have, it is in human nature.
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Do you also believe
that maybe this changing interest rates will influence
borrowing in Russia and maybe even will speed up
consumers' funding because of credits available
from the banks to final consumers.
It is early to say that credits in Russia, I
mean the domestic borrowing is playing such a
significant role. You know no more than 40% of
all investment resources, which companies have
for production is credits, the rest is their own
resources in form of their profit, maybe something
else. And we have a look at the consumer sector
the role of the credits is still less. We have
an absolutely different economy from that of the
US for example. In the USA many households prefer
to invest current income and to buy cars or some
durables using credits. It is a typical behaviour
of an average US household. In Russia the situation
is absolutely different, almost for all durables
the source for purchasing is accumulation, of
households revenues in sberbank's accounts, I
have first to accumulate money within 6 months,
I split my monthly salary in two parts - one for
accumulation, one for current consumption, when
the amount is enough I make the purchase, that
is a different type of behaviour. Credits do not
play any role. And the interest rate is not that
significant, I just have to track the situation.
Is it interest paid by Sberbank comparable to
inflation or not. Because if inflation is higher,
it is very difficult to accumulate money. Just
this criteria, nothing else.
And looking more at the companies' side and
especially at the markets, how the markets are
influenced by credit rates. Do you believe that
this policy could have a similar role like Mr.
Bridswell in the US?
For Russia interest rates do not play that significant
a role. Exchange rate is much more significant.
The problem is that Russian industrial sector
could be split in two parts: successful companies
which are in the position to compete. Most part
of them are companies dealing with raw materials:
Mr. Khodorkovsky is one of the best examples.
Yukos is a well managed company but it is based
on oil. And we have some selected companies which
are not connected with oil but are a full industry:
Wimm Bill Dann. Of course these companies are
in the position to borrow money, should it be
inside or outside of the country. And of course
they are looking at the interest rates, which
is one of the key indicators for them. But there
is quite a substantial part of economy, whose
level of development is not enough, they are not
in the position to borrow significant money and
for these companies the only source of development
is their own resources and not an IPO but some
changes in ownership. To find somebody else who
is ready to invest money, and as you can understand
in this case interest rate does not play any significant
role. Because your role is not to find some appropriate
money from the point of view of your price. Your
role is to find ownership, partner or to accumulate
some profit. It is different here.
We spoke before about a very important issue
of keeping inflation at a very low level. Do you
believe that inflation will go down in a single
digit in Russia.
Not so quickly. I do not speak about post crisis
hike, it was inevitable. But we are moving from
20.6% in 2000, 18% in 2001, I hope something like
14-16% this year. It means two percent less every
year. It is very similar to the Mexican policy,
some 5 or 10 years ago. When the government said
that it was going to reduce inflation but heir
target was one digit inflation and two percentage
points minus every year. I think our pass is similar,
we are moving towards single digit inflation but
we are not so quick. We suppose that in 2003 inflation
will be around 10, maybe 12. Then if the policy
is sustainable I hope it will be another minus
2 = 8. 8 is a one digit ratio and this is our
target for 2004. A very slow pass, because I think
first of all it is very difficult to overcome
inflation expectations and actually I do not see
in Russia any serious opposition to current inflation.
Many bankers and industrialists say that the inflation
is not too high, it is very convenient for us,
we are ready to work. Just some part of population
is not happy, especially with low income. These
people say that inflation is very dangerous. It
is quite clear, because you know that actually
in any country inflation is the enemy of households
with small level of income. It is absolutely comfortable
for upper and upper middle class because they
can overcome these problems.
We spoke before about the economy being very
much linked to the world economy, especially with
this high percentage of export. Does it give you
the opportunity to maybe work closer together
with other national banks, maybe CBE or Federal
Reserve in the US. Is it the case with you?
We have a cooperation actually with major Central
banks. I think every month we have a couple of
people in New York with some seminars or exchanges.
We have good relationship with the Central bank
of France, others. And of course we are heavily
involved in the activity of the Bank for International
Settlements, the bank created to coordinate Central
Banks' Policies, the quality, rules.
Is it for you to get the same direction as
for example the ECB, working very tightly with
New York for example to have the same policy.
Is that an important issue.
In long term of course. I cannot say that in
short term we can move smoothly to ECB policy.
Theirs is much more sophisticated than ours. It
is reasonable, but for example Federal reserve
policy is much more sophisticated than that of
the ECB. There are many grades. But we are moving
in this direction. For example we intend to create
a new for us instrument and to start interventions
on the open market, it is a move in the right
direction.
Looking at your background and you just came
from the Troyka Dialog, which is a very different
position in a more private and investment oriented
company. How is this helping you to perform? How
do you apply your experience?
Basically I spent two and a half years in the
private sector, in the investment bank Troyka
dialog and that was a good opportunity for me
to see how real operations are made, how decisions
are made. Because sitting in this chair of the
central bank, in this top position without any
experience of how in reality in Russia the decision
making process is organised, or what the mentality
of the guys is who are operating in the financial
markets, it is very difficult to make the right
decision, it is very significant. We are not bureaucrats,
because according to the Russian legislation staff
of the Central Bank are not state servants excluding
the Chairman who is a state servant, and this
is why we have no state guarantees. We are bankers,
but at the same time we are bureaucrats because
we are managing the policy from the part of the
state. And I think that for such bureaucrats it
is very useful to spend some time in the private
sector, this would improve our decision making
process and the knowledge of the market inner
mechanisms and levers. And actually of course
it is very important to look at the relationship
in the private sector, I mean the relationship
between people, I think it is also very useful.
Maybe not very useful for your country, but for
Russian you cannot overestimate it. Because in
Russia there is still much bureaucracy, which
is still that of the Soviet Union. But in business
there are a lot of new people, which were created
after the perestroika, under market economy. And
there is huge discrepancy, an abyss between this
business style and the old Soviet style. I believe
that in the US this discrepancy must be smaller
because all of these people were brought up in
the market economy, in the same economy. This
is why for us it is different.
Does it make you and the Central bank more
difficult to manoeuvre or to move and make decisions
due to different styles of bureaucracy when you
function.
I think that among the Russian governmental agencies
the central bank is more or less in a good position
because first of all there is a lot of quite professional
people because the compensation in the Central
Bank is better, substantially better than in most
of the state sector institutions. And this is
why the central bank is in position to attract
people. We have some staff hired from the private
sector. To look better.
Just looking at the next years to come - some
three or four years. What would be your challenge
now with the new team to basically improve the
way the Central Bank functions? What would you
call the number one challenge.
I think a real challenge is to improve the supervision
area. And that is the area Mr. Kozlov is responsible
for. So he is responsible for one of the first
challenges of the Central bank. Without this problem
solved successfully it will be difficult to move
forward.
And the second is the payment system. It is impossible
that the payment system is a crucial thing for
the Central banks activities everywhere. Because
it is possible to have the best settlement system,
or not the best, but at any rate life is life
and everything will change. But I think it is
time to create normal settlement system in Russia
because we are very attractive in Moscow region
or in some selected regions in this country from
the point of view of our monetary instruments.
But there are many regions throughout Russia and
quite many of them which are not in the position
to use these opportunities just because there
are no proper settlement systems. I think this
will change.
Then monetary policy, its improvement. These are
the challenges. And of course there are some internal
issues, I think the structure, the organisation
of the Central bank should be reconsidered as
well. Because from my point of view we have quite
as big staff, sometimes not very efficient. There
is a long story of how it has to come to this
point. But it is quite a serious task to modernise
the Central bank from the inside.
As the final message top the readers of our
report keeping in mind that they are mainly potential
investors.
I suppose I could say please look at Russia very
seriously, because I think Russia has substantial
opportunities but seriously it means also lots
of peculiar details because still the Russian
economy and policy is not similar to the policy
of the developed countries. There are some specific
features created by the transition period and
for many investors or companies it is crucial
to understand details. Do not use cliché
like "I am at program, everything is similar
for everybody", it will be very useful for
these companies to look at the details.
Note: WINNE cannot be held responsible for the
content of unedited transcriptions.
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