Russian Central Bank's policy

Aleksey Ulyukaev, First Deputy Chairman, Central Bank of the Russian Federation

1956 - Born in Moscow
1979 - Graduates, Moscow State University
1982 - Receives PhD in economics, Moscow State University
1982 - Assistant professor, Moscow Engineering and Construction Institute
1988 - Consultant, department head, Communist magazine
1991 - Political observer, Moscow News newspaper
1991 - Economic advisor to the government of the Russian Federation
1992 - Head, advisors group to the Russian Prime Minister
1993 - Advisor to the first deputy prime minister
1994 - Deputy Director, Institute of Economic Problems of Transitional Period
1996 - Deputy, Moscow city Duma
1998 - Deputy Director, Institute of Economic Problems of Transitional Period
2000 - First deputy Russian Finance Minister
2004 - First deputy chairman, Central Bank of the Russian Federation

Today we will be summing up the grim economic results of 2008. Russian authorities declare that the year hasn't been a disaster for the Russian economy, despite the global credit crunch and the unfolding economic crisis. Does that mean that the WORST is yet to come? The man who should know the answer is Aleksey Ulyukaev, First Deputy Chairman of the Russian Central Bank.

Today we will be summing up the grim economic results of 2008. Russian authorities declare that the year hasn't been a disaster for Russian economy, despite the global credit crunch and the unfolding economic crisis. Does that mean that the worst is yet to come? The man who should know the answer is Aleksey Ulyukaev - First Deputy Chairman, of the Russian Central Bank.

Spotlight:  Is it true that the crisis hasn’t really hit Russia, that we are yet to witness the hard times?

Aleksey Ulyukaev: Well, the crisis is a global phenomenon and since Russia is part of the global economy, global trade and the global financial market, we were influenced and, I would say, we were influenced a lot by the crisis. Nevertheless, that was the beginning of the crisis. Of course, we have at least three channels of influence that global problems have on Russia. First of all, it’s trade, because the global recession means that the commodity prices have a tendency to fall. We have seen that, for instance, oil prices moved down from $130 per barrel of Russian oil to $33-$34 a couple of weeks ago. That is a three-fold decrease. This creates problems for the budget, problems for private companies, for everybody’s revenues and problems for the banking system as well. The second issue is that of debt. The Russian foreign debt is quite small, meaning the sovereign debt. But the corporate debt is quite big, at the moment it is around $450 billion. As soon as the markets are closed in terms of refinancing the foreign debt, it means that the companies and banks have problems with debt. The third issue is the stock market. All the indexes have fallen and the highest point for the Russian market index was in May at approximately 2300. The lowest point was 550 points, which was four times lower. All of these three things influenced the banking system, influenced financial situation in companies, their revenues, profits and so forth.

SL:  There are different opinions on how long the crisis will last. Some say that in spring things will turn for the better, some say in August, in autumn, some even say that it will last until 2010. What do you think?

A.U.: It is very hard to predict. If we look at a previous very big crisis, such as the Great Depression in the 1920’s and 30’s and the crisis of the 50’s we will see that normally it takes 2-3 years, after the lowest point is fixed, for the volatility of the indexes and figures to subdue. I think in this case, we are looking at the end of 2009 or the beginning of 2010 for the beginning of the recovery period. So I think we still have one more troubled year ahead of us.

SL:  So, as a banker, you aren’t very optimistic.

A.U.: Well you know that joke about the optimist and the pessimist. The pessimist is a better informed optimist.

SL:  People around the world are saying that the Russian government is taking very adequate and good measures to cope with the crisis, but the world rating agencies continue to downgrade Russia’s rating. Why?

A.U.: The position differs from agency to agency. One of them, S&P, re-estimated the rating, making it -1, other agencies simply changed their outlook rating from, say, “positive” to “stable”. Their main problem is that of reserves. They do not estimate quite correctly the economic fundamentals, like the real economy, growth and so on and so forth. Their main point is the credibility of the bank, company or country and in the case of the sovereign situation, the credibility is mostly linked with the reserves. The highest point of Russian reveres was $595 billion in July. Now it is down to “only” $440 billion, meaning that we lost around a quarter. This was related to several different things. First of all, this is a statistical estimation, a mathematical function which takes into account the fluctuation between the dollar and the euro. As soon as we fixed our reserves in dollars, meant that statistically the reserves went down. Approximately $50 billion was lost in the conversion. Around $100 billion more was lost in our capital operations, because of the capital outflow in Russia in October, November and early December.

SL:  Speaking of losses, can you give us the volume of the capital outflow from Russia this year.

A.U.: During the three quarters, Russia has a neutral position, in terms of net private capital inflow or outflow. We have a very good second quarter of the year and more or less average first and third. But starting in September and October, we have began accumulating capital outflow and, after 11 months, it is around $80 billion. Probably, the final figure for 2008 could be closer to $100 billion.

SL:  Which is significant for Russia… or not really?

A.U.: It depends. Statistically, it’s quite a big figure, but if we look thoroughly, we will see that only part of this money is money going back by investors getting it back from stock markets. Some of that is just the result of the currency position correction issued by the banks. Banks had negative currency  assets during that time. They borrowed from abroad and got their loans here in roubles. Their debts were eliminated in dollars and euros while their credits were eliminated in euros mostly. So now they tried to rebalance the position and make the situation more stable. It is therefore reasonable behaviour from their point of view. Since now the population prefers to get their deposits in banks in dollars or euros and the structure of the deposits made by the population is changing from roubles to the currency deposits, the banks get many additional passives in currencies. They also get their short-term deposits in foreign banks in currencies.

SL:  What is disturbing is not today’s figure of the capital outflow, but the fact that it started in the end of the year and it seems to be continuing and it seems that it will stay with us in 2009. Do you think so?

A.U.: Most probably, the situation will continue.

SL:  Which is bad.

A.U.: Which is really bad, but not dramatic. Probably, some amount of money will not be refinanced as debt obligations for our companies and banks from their creditors. Their credit agreements have various claims that can be made to the creditors, which means that they have to pay some part of the debt in accordance to some additional law adapted by the parliament a couple of months ago. The Central Bank and the National Bank of the Russian Federation have a limit of $50 billion to help Russian companies pay this debt, but it isn’t 100% of the needed money. This means that the companies need to look for some new possibilities to pay. There is no refinancing and they will have to pay which will be the minus from the resource.

SL:  Says Aleksey Ulyukaev, the first deputy chairman of the Central Bank of the Russian Federation. Spotlight will be back shortly, after the break.

SL:  Welcome back to Spotlight. I’m Al Gurnov, and just to remind you that our guest today is Aleksey Ulyukaev, the First Daputy Chairman of the Central Bank of the Russian Federation. Mr. Ulyukaev, Russia was very proud of having created this ‘financial airbag’ so to say – the large sums of money that the Government has accumulated by selling the expensive oil. Is there anything left?

A.U.: I would say something is left, of course. I would say we now have $440 billion in our stocks. It means we’re still number three in the world after China and Japan. And this sum is divided between us – the Central Bank – and the Finance Ministry. Roughly $260 billion is ours and $180 billion is owned (sic!) by the Finance Ministry.

SL:  These are the figures, but will this ‘something’ be enough to live through the next year which you just said will also be…

A.U.: Of course, yes. There are different kinds of methodology, I mean, how many months of import can reserves cover and cover the foreign debt payments. In both these senses we have more then enough currency to fulfil all out obligations – not only in 2009, but also if necessary in 2010 also. We are in position to pay everything.

SL:  Mr Ulyukaev, you are one of the heads of the Central Bank of Russia. Why does the Central Bank produce the coins? Many shops in Russia no longer take Russian pennies – the 10 kopek coins and lower. Why do you produce what many of the people don’t event care to pick up from the sidewalk? Are they worth the production cost?

A.U.: Because we have to. We produce them because we have to in accordance with the legislation. We understand the point and our position is to abolish the smallest coins – at least 5 kopeks or 10 kopeks and smaller. But it’s up to the Parliament to adopt this or that decision, and of course we will fulfil it if they do.

SL:  By producing these coins you are loosing money, are you?

A.U.: We are loosing.

SL:  But why don’t you ask the Parliament to react quickly to that?

A.U.: Well, we generally asked, but you see now there are a lot of more important questions then just this coin problem. It’s a small loss for us.

SL:  A great Russian saying says that a kopek takes care of a whole rouble…

A.U.: That’s true.

SL:  As a measure against the crisis Russia is devaluating the rouble. How much do you think can the rouble loose next year against the bi-currency basket?

A.U.: It depends. Probably, nothing, because the currency position depends on the balance of payment. Reasons existed in 2008 for some weakening of the rouble against other currencies, because of the problem with oil and other commodity prices. The fantastic fall – three times fall of this position. That, of course, is the problem of the current account of the Russian budget. Then – the capital outflow also.

But now we see that global tendencies are a little bit changing. I mean the dollar-euro correlation. The highest point of euro to dollar was 1.6 in May, I think. After that the dollar became stronger and stronger till the beginning of December and then the position was 1.25. It’s 35 cent difference. But after that one more U-turn of tendency, and the dollar is going down now. Analysts believe that today we have a fantastic figure, fantastic – 1.47 dollars per euro. A very fast down tendency for the dollar. And probably we’ll have even higher figures 2009. Normally commodities have opposing tendency to the dollar. The weaker the dollar – the better the prices.

SL:  Devaluation may be good for businesses, but is it good for ordinary people?

A.U.: Just a second. It means that the balance of payment will probably be much better in 2009 then people think now. And probably the devaluation will not be necessary in that period of time. But from the point of view of ordinary people it means nothing. It’s crazy thinking that our population has much interest in these figures: dollar to euro, euro to dollar, NASDAQ… As long as you have your revenues in roubles and you pay in roubles, this rouble to dollar or to euro means nothing to you. Nothing absolutely! Inflation – that is important to you.

SL:  What’s your forecast for the next year for inflation?

A.U.: Inflation? I think we’ll have it around 10 percent.

SL:  This is what they say every year. But it’s usually higher.

A.U.: Probably a little bit higher. You see, the forecast for the next year is difficult, especially now because of the change of tendencies in the global markets. But generally the analysts believe that the world recession will exist in 2009, and it meats there are some factors quite positive for inflation control. The food prices – global food prices are going down. Energy prices – very low. It means from the demand point of view and from the price of commodity point of view we have good chanced to control inflation.

SL:  Speaking about ordinary people, you say they don’t care. But they do care! When they see that the rouble is going lower and lower against world currencies day after day, what they do is they go to a bank, they sell their roubles and they buy hard currency – dollars and euros. If that happens – and it may be like a panic – wouldn’t it be like a double blow to the financial system?

A.U.: I say and I see that our people are wiser then you say. In October, there was some minor evidence of this behaviour. Really the exchange points were full of people buying and selling. Now it has stopped, no panic at all. So people do understand our policy. They understand they have enough time and possibilities to change the structure of their deposits. And now they do not operate in cash. They operate with their deposits in banks. If someone really thinks that the rouble will be weaker against other currencies, he can transfer his rouble deposits into dollar or euro deposits. The share of these deposits is going up, but not very fast. So the situation is quite calm, and I think it’s comfortable for the people.

SL:  One question I wanted to ask you is sort of personal. I remember when they introduced the so-called Big-Mac index – it’s like evaluating economy by the cost of the hamburger. Today many serious analysts start using and quoting this Big-Mac index. Is it a joke?

A.U.: All the jokes are partially jokes and partially true. Respectable magazines like The Economist for instance use Big-Mac index. It’s quite simple and understandable. It’s a small basket of commodities like meat, bread onions. All the economists use baskets of commodities – this one is small. And it’s universal, it’s the same in all countries. So you can use it. And if we use Big-Mac index for the Russian rouble, we’ll see that it’s underestimated (sic!), it still has room to be harder against other currencies.

SL:  We all know that the Russian economy was overheated on the eve of the crisis and everybody admitted that. Is there a risk of new bubbles emerging in the Russian economy? Or was the crisis a sort of stabilizing factor?

A.U.: Sometimes a crisis is a good thing. I think it’s globally stabilizing, it’s quite a good medicine against bubbles in commodity prices, in real estate prices, in stock indexes, and so on, and so forth. I think now the era of bubbles is over. Probably for some time, or forever – I don’t know. Now the situation has become more healthy.

SL:  The efforts of the OPEC countries to decrease their production of oil didn’t seem to work a lot. The oil prices are not going down. With the oil prices decreasing, do you think Russia will have to cut its budget?

A.U.: Just yesterday the Government announced the forecast for the next year, and the main position is $50 per barrel of Urals. I think it’s quite a reasonable and understandable point, and in that case the budget has some small deficit and we have enough reserves specially collected for that very purpose – I mean the Reserve Fund and the Fund of National Welfare. It’s more then enough to cover the problem. And even if the oil price is lower – say $40 or even $30 – it will be still enough to cover all the problems for 2009.

SL:  Thank you, thank you very much. And to remind you that our guest today was the well-informed optimist Aleksey Ulyukaev, First Deputy Chairman of the Central Bank of the Russian Federation.

That’s it for now. If you want to have your say on Spotlight and have someone in mind who you think I should interview next time, please, email me and algurnov@rttv.ru Let’s keep the show interactive. We’ll be back tomorrow with more first-hand comment on what’s going on in and out of Russia. Until then, stay on RT with us. Take care.

SL:  Welcome back to Spotlight. I’m Al Gurnov, and just to remind you that our guest today is Aleksey Ulyukaev, the First Daputy Chairman of the Central Bank of the Russian Federation. Mr. Ulyukaev, Russia was very proud of having created this ‘financial airbag’ so to say – the large sums of money that the Government has accumulated by selling the expensive oil. Is there anything left?

A.U.: I would say something is left, of course. I would say we now have $440 billion in our stocks. It means we’re still number three in the world after China and Japan. And this sum is divided between us – the Central Bank – and the Finance Ministry. Roughly $260 billion is ours and $180 billion is owned (sic!) by the Finance Ministry.

SL:  These are the figures, but will this ‘something’ be enough to live through the next year which you just said will also be…

A.U.: Of course, yes. There are different kinds of methodology, I mean, how many months of import can reserves cover and cover the foreign debt payments. In both these senses we have more then enough currency to fulfil all out obligations – not only in 2009, but also if necessary in 2010 also. We are in position to pay everything.

SL:  Mr Ulyukaev, you are one of the heads of the Central Bank of Russia. Why does the Central Bank produce the coins? Many shops in Russia no longer take Russian pennies – the 10 kopek coins and lower. Why do you produce what many of the people don’t event care to pick up from the sidewalk? Are they worth the production cost?

A.U.: Because we have to. We produce them because we have to in accordance with the legislation. We understand the point and our position is to abolish the smallest coins – at least 5 kopeks or 10 kopeks and smaller. But it’s up to the Parliament to adopt this or that decision, and of course we will fulfil it if they do.

SL:  By producing these coins you are loosing money, are you?

A.U.: We are loosing.

SL:  But why don’t you ask the Parliament to react quickly to that?

A.U.: Well, we generally asked, but you see now there are a lot of more important questions then just this coin problem. It’s a small loss for us.

SL:  A great Russian saying says that a kopek takes care of a whole rouble…

A.U.: That’s true.

SL:  As a measure against the crisis Russia is devaluating the rouble. How much do you think can the rouble loose next year against the bi-currency basket?

A.U.: It depends. Probably, nothing, because the currency position depends on the balance of payment. Reasons existed in 2008 for some weakening of the rouble against other currencies, because of the problem with oil and other commodity prices. The fantastic fall – three times fall of this position. That, of course, is the problem of the current account of the Russian budget. Then – the capital outflow also.

But now we see that global tendencies are a little bit changing. I mean the dollar-euro correlation. The highest point of euro to dollar was 1.6 in May, I think. After that the dollar became stronger and stronger till the beginning of December and then the position was 1.25. It’s 35 cent difference. But after that one more U-turn of tendency, and the dollar is going down now. Analysts believe that today we have a fantastic figure, fantastic – 1.47 dollars per euro. A very fast down tendency for the dollar. And probably we’ll have even higher figures 2009. Normally commodities have opposing tendency to the dollar. The weaker the dollar – the better the prices.

SL:  Devaluation may be good for businesses, but is it good for ordinary people?

A.U.: Just a second. It means that the balance of payment will probably be much better in 2009 then people think now. And probably the devaluation will not be necessary in that period of time. But from the point of view of ordinary people it means nothing. It’s crazy thinking that our population has much interest in these figures: dollar to euro, euro to dollar, NASDAQ… As long as you have your revenues in roubles and you pay in roubles, this rouble to dollar or to euro means nothing to you. Nothing absolutely! Inflation – that is important to you.

SL:  What’s your forecast for the next year for inflation?

A.U.: Inflation? I think we’ll have it around 10 percent.

SL:  This is what they say every year. But it’s usually higher.

A.U.: Probably a little bit higher. You see, the forecast for the next year is difficult, especially now because of the change of tendencies in the global markets. But generally the analysts believe that the world recession will exist in 2009, and it meats there are some factors quite positive for inflation control. The food prices – global food prices are going down. Energy prices – very low. It means from the demand point of view and from the price of commodity point of view we have good chanced to control inflation.

SL:  Speaking about ordinary people, you say they don’t care. But they do care! When they see that the rouble is going lower and lower against world currencies day after day, what they do is they go to a bank, they sell their roubles and they buy hard currency – dollars and euros. If that happens – and it may be like a panic – wouldn’t it be like a double blow to the financial system?

A.U.: I say and I see that our people are wiser then you say. In October, there was some minor evidence of this behaviour. Really the exchange points were full of people buying and selling. Now it has stopped, no panic at all. So people do understand our policy. They understand they have enough time and possibilities to change the structure of their deposits. And now they do not operate in cash. They operate with their deposits in banks. If someone really thinks that the rouble will be weaker against other currencies, he can transfer his rouble deposits into dollar or euro deposits. The share of these deposits is going up, but not very fast. So the situation is quite calm, and I think it’s comfortable for the people.

SL:  One question I wanted to ask you is sort of personal. I remember when they introduced the so-called Big-Mac index – it’s like evaluating economy by the cost of the hamburger. Today many serious analysts start using and quoting this Big-Mac index. Is it a joke?

A.U.: All the jokes are partially jokes and partially true. Respectable magazines like The Economist for instance use Big-Mac index. It’s quite simple and understandable. It’s a small basket of commodities like meat, bread onions. All the economists use baskets of commodities – this one is small. And it’s universal, it’s the same in all countries. So you can use it. And if we use Big-Mac index for the Russian rouble, we’ll see that it’s underestimated (sic!), it still has room to be harder against other currencies.

SL:  We all know that the Russian economy was overheated on the eve of the crisis and everybody admitted that. Is there a risk of new bubbles emerging in the Russian economy? Or was the crisis a sort of stabilizing factor?

A.U.: Sometimes a crisis is a good thing. I think it’s globally stabilizing, it’s quite a good medicine against bubbles in commodity prices, in real estate prices, in stock indexes, and so on, and so forth. I think now the era of bubbles is over. Probably for some time, or forever – I don’t know. Now the situation has become more healthy.

SL:  The efforts of the OPEC countries to decrease their production of oil didn’t seem to work a lot. The oil prices are not going down. With the oil prices decreasing, do you think Russia will have to cut its budget?

A.U.: Just yesterday the Government announced the forecast for the next year, and the main position is $50 per barrel of Urals. I think it’s quite a reasonable and understandable point, and in that case the budget has some small deficit and we have enough reserves specially collected for that very purpose – I mean the Reserve Fund and the Fund of National Welfare. It’s more then enough to cover the problem. And even if the oil price is lower – say $40 or even $30 – it will be still enough to cover all the problems for 2009.

SL:  Thank you, thank you very much. And to remind you that our guest today was the well-informed optimist Aleksey Ulyukaev, First Deputy Chairman of the Central Bank of the Russian Federation.

That’s it for now. If you want to have your say on Spotlight and have someone in mind who you think I should interview next time, please, email me and algurnov@rttv.ru Let’s keep the show interactive. We’ll be back tomorrow with more first-hand comment on what’s going on in and out of Russia. Until then, stay on RT with us. Take care.