Central Bank Governor of the Year, Central & Eastern Europe 2015
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Central Bank Governor of the Year, Central & Eastern Europe 2015

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Elvira Nabiullina, Russia

Russia’s central bank governor staged a rapid and brave response to what could have been an outright crisis in Russia, amid a sharp collapse in the oil price, new economic sanctions and conflict in Ukraine. A brave hike in the policy rate in late December, however, is just half the story

A halving in the price of the source of most of the country’s exports and a large proportion of the government’s revenues was by no means the Russian central bank’s only problem in late 2014. An escalating war in Ukraine was scaring off investors and some of its biggest banks and corporates were effectively shut out of international markets by EU and US sanctions.

But from mid-December last year, central bank governor Elvira Nabiullina oversaw a skillful and bold adjustment to lower oil prices and heightened investor aversion, rapidly curtailing demand via higher rates and a weaker currency. The adjustment was so effective that the current account surplus in the second quarter of this year, around $19.2bn, was much larger than in the second quarter of 2014 ($12.1bn).

Such potentially contentious action — including a 650bp hike in the main policy rate to 17% on December 15, amid a drop in the rouble of more than 40% — might be a surprise to those who had previously questioned Nabiullina’s independence. Her past as President Vladimir Putin’s chief economic adviser and before that his economy minister led some to assume her nomination to replace Sergei Ignatiev in May 2013 was simply a way for Putin to get a growth-focused governor.

In the event, Nabiullina astutely sold the message of what she had to do to avert a crisis and made the right policies without incurring politicians’ wrath, says Jan Dehn, head of research at Ashmore Investment Management. “The Russian central bank has shown itself sensitive to what the market needs and not afraid to take action when it’s required,” he says. “Whatever you think about Putin and Ukraine, Nabiullina is a technocrat who has demonstrated impressive leadership.”

Dehn says the adjustment from late 2014 followed policies to which Nabiullina had contributed before the shocks, including movement to inflation targeting and a floating rouble. When the oil price collapse came, the country had around $470bn in foreign exchange reserves and a debt-to-GDP ratio below 20%. The Euroclearability of rouble bonds from February 2013 also helped, says Dehn.

Despite worries it was slightly too late, Phoenix Kalen, emerging markets strategist at Société Générale, says the hike was effective in pushing ordinary Russians back to local currency, with bank rates above 20%. “That was the turning point — when [retail depositors] stopped converting to dollars,” says Kalen.

Nabiullina added other measures, which Kalen says were crucial. One was a repo programme to improve dollar liquidity at banks and corporates and moves to encourage them to increase holdings of government securities. That helped bring down sovereign spreads, which at one point reached more than 700bp over US Treasuries — way over the likes of Senegal, Paraguay or Sri Lanka, says Dehn.

“The central bank was one of the first to realise this was unsustainable,” says Dehn. “Corporates would have been borrowing at 1,200bp over Treasuries, which wouldn’t have been rational or good for the economy.” He says the repo programme allowed sovereign spreads to return to a more reasonable level and Russia became one of the world’s best performing bond markets in the first quarter of 2015.

Most important, says Dehn, is that it was all done in a market-friendly manner — so no capital controls, which he insists can be tempting but undermine long term investor confidence.

“Overall, the central bank’s response was largely appropriate,” says Ed Parker, managing director in sovereign ratings at Fitch. “Faced with an external shock, the central bank let the currency depreciate, which has helped the economy adjust. It raised rates aggressively when it was needed and gave support to Russian corporates indirectly, to allow them to repay external debt they couldn’t roll over because of international sanctions.”



STRENGTH IN ADVERSITY

Central bank governor Elvira Nabiullina says a switch to inflation targeting and a floating rouble has helped Russia adjust and avoid an inflationary surge. Exports have dropped by about a third this year, she says, but imports have fallen further — leading to a projected current account surplus of around $73bn.

“We estimate the Russian balance of payments to be stable at the current or even lower oil price levels,” she tells Emerging Markets. As the market stabilised in the first half of 2015, Nabiullina was able to cut rates six percentage points, but she says the resurgence of inflation risks in August and September meant she left rates unchanged in September.

The governor says her new refinancing programme from late 2014 has helped private sector foreign exchange repayments, improve banks’ dollar liquidity and stem currency and inflation pressures. Local banks will now be funders and profiteers as the economy transitions to more productive export and import substitution industries, she says.

Still, Nabiullina notes non-performing loans more than tripled to 7.9% in the first eight months of 2015, with economic slowdown and declining household incomes weighing down credit quality. Aside from a Rb900bn ($14bn) government bank recapitalisation, she says she temporarily softened credit evaluations of borrowers hit by external conditions.

According to Nabiullina, banks have responded by tightening corporate borrowing criteria, limiting riskier retail lending and improving funding and risk management models. “The shocks swaying the banking sector were mitigated by the Bank of Russia’s consistent two year policy aiming to expel weak banks from the market,” she adds. She also describes new monitoring and capital requirements for systemically important banks, in line with global norms.

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