The economic road ahead
RT: There are some signs of an economic turnaround for major global economies. Are you expecting to see data showing signs of a similar turnaround in Russia over the coming months? Are you expecting a sharp rebound or a slow and gradual rebound?
NK: Just as I can't really believe in a sustainable sharp rebound worldwide – as I cannot see any economic mechanism that could propel the new growth – neither do I believe in a really sharp rebound in Russia. At least, until we see oil rebounding to $140/bbl again, which, in turn, would certainly precede another leg of a W-shaped world crisis. I think it is inappropriate to compare Russia with OECD economies, and that the BRIC nations are a better comparison.
Russia shrank more rapidly than its BRIC peers, but this in no way means that it would recover as fast as some of them could potentially do. It has been broadly acknowledged that countries with sound macroeconomic fundamentals would rebound in a more sustainable way. At first glance, Russia, which still runs a current account surplus, is a candidate for such a sharp recovery. Nonetheless, a less sound economic structure hinders this.
One cannot ignore the fact that at least the Chinese stimulus was far more aggressive than that in Russia, and, more importantly, China possesses its own domestic engine to put the new growth in motion, and an appropriate lever to handle its recovery, a large banking system. Unfortunately, the only significant advantage that Russia has is its reserve cushion. But even this advantage is difficult to apply effectively: the banking system lags substantially behind a bunch of large, mainly state-controlled corporations that form the backbone of the national economy.
The reason for such disproportion is obvious: the Russian private sector lacks savings badly, while such savings were once largely replaced by foreign borrowing. This cannot be easily corrected within one or two years, due to a distorted economic structure dominated by crude producers, export-oriented giants like Gazprom or Rosneft.
RT: The Central Bank of Russia (CBR) has again cut the overnight rate. Do you believe this cut will help push Russia out of recession? Do you believe further rate cuts will be required?
NK: The CBR easing has been indispensable and largely expected. One would have noticed, that the CBR was mainly preoccupied by stemming inflation and, in the meantime, controlling the Rouble exchange rate, similar to the Ministry of Finance generally being busy building reserves, and paying somewhat less attention to the rest economy. The CBR fought inflation even at the apex of the credit crunch by raising rates (in this step it was almost alone globally, apart from Hungary and a few others). Actually, the CBR is easing cautiously, and that is welcome anyway. I must admit that nowadays the CBR easing looks a bit more important to the general economy as the foreign capital inflow which had been a very important liquidity source for Russia in 2006-2007 has become almost nonexistent. But still, the CBR's policy alone is unable to be a decisive cure for the real sector – As I've said, the Russian banking system is still too small compared to the major parts of the real Russian economy.
RT: One of the downside risks being noted is the volume of non performing loans in the Russian banking sector, and the need to restructure many of these before about the end of 1Q 2010. Do you believe the banking system will handle the requirement without further government intervention?
NK: No one would exclude further government interventions at this point – even the government itself. In terms of banks' regulation Russian accounting looks rather murky, so the real amount of NPLs is not clear. Unlike American bodies in charge of banking scrutiny, the CBR looks like it will be unwilling to let banks to hide away their bad loans. A statement has been revealed telling banks to report NPLs to the full extent, including those already taken off balance sheets. Meanwhile, given the relatively small size of the Russian banking system, with its gross assets at around $800 billion, and a large concentration of assets and capital in the top 50 banks, NPLs even at 15% do not represent a deadly systemic threat to the entire economy and obviously can be handled by the monetary authorities.
RT: Government figures have recently been noted as saying there is likely to be a reduction in the number of banks in Russia. How important for the banking system is it that a consolidation takes place?
NK: Consolidation remains on the top of the agenda for the domestic banking system which actually comprises around 1000 banks, of which only top 50 seem to be at least close to even modest international standards in terms of their size. Many talks are being held today globally on the adequacy of the too-big-to-fail mantra concerning US banks, and many are sounding negative about the scale and, thus, systemic weight of, e.g., Citi Bank or Goldman. This is not very relevant for Russia which faces problems of quite an opposite nature: its banking system is not large enough to serve the real sector effectively, and to maintain its sustainable expansion, it is not sophisticated enough to offer many services that businesses need today, is not capitalized enough to extend large credits to entities like Gazprom and to take more risk in the small business area at a reasonable price (although Russian banks are leveraged at only 1:9 on the average).
RT: The economic downturn has pushed Russia into a budget deficit. What are the implications of having a significant budget deficit?
NK: As long as crude oil stays at above $50 per barrel – which is a very likely scenario for the foreseeable future – one would not expect serious trouble endangering the Russian fiscal domain. Also it should be noted that Russian public debt has been so insignificant (less than 10% of GDP), that the fiscal deficit issue would not obviously bother too much the government. Even a relatively large deficit of, e.g., 8% of GDP, looks sustainable.
RT: What is your outlook for the Rouble?
NK: It stands a good chance of appreciating against both the U.S. Dollar and the basket on carry trades (comprising mainly the U.S. Dollar and the Euro). And, again, as the Russian current account improves over time, due to massive dollar inflation vs. basic commodities, the Rouble might appreciate further. However, that appreciation would certainly be contended by the CBR which has recently proclaimed its determination to keep its hand on the currency, although to a lesser extent, and the Rouble might also show some volatility as global markets are promising to be highly volatile going forward into 2010.