Nabiullina aims to dampen inflation expectations further,

start replenishing reserves after hitting inflation target In an exclusive interview with EM A.M., Bank of Russia Governor Elvira Nabiullina talks about the priorities for her second term in office, Russia's capital markets, what the bank is doing to strengthen ties with China — and how Donald Trump has affected her job. The interview was conducted in English by email, and is published here in full. Congratulations on your reappointment as Governor of the Bank of Russia. What do you see as the most significant achievement of your first four years in office, and what targets have you set for your second term? Thank you, but I haven’t been reappointed yet. The President nominated me for the next term, and in June the Parliament will vote for approval of this nomination. Considering the fact that through the past four years the Bank of Russia has had to face serious challenges in the financial system, I think we can speak about some progress but not achievements yet. Strategy The Bank of Russia has taken two strategic decisions to decrease the effect of external shocks two years ago: to implement a fully-fledged inflation-targeting policy since early 2015 and operate a floating exchange rate policy since late 2014. Over the past 2 years we have managed to substantially reduce inflation: from 16.9% in March 2015 to 4.3% in April 2017. This result has been achieved, among other things, through moderately tight monetary policy pursued by the Bank of Russia.

Now our monetary policy is focused on achieving low and stable inflation to protect people’s savings and improve conditions for business planning and investments. Now, when inflation has already fallen significantly, the Bank of Russia still has to make sure that inflation will remain close to the target of 4% in the medium-term. In order to achieve this, we need to further dampen inflation expectations. Banking reform We are in the process of cleaning up the banking system, revoking licenses from weak and imprudent banks. The banking system is stable and capable of providing financial resources to the economy. The next step is to reform banking supervision, to make it respond faster and more efficiently to problems in banks. Along with that, we are working on new regulation both implementing international standards and developing measures suitable particularly for Russian banking system. Last year the Basel Committee on Banking Supervision assessed Bank of Russia regulatory framework and approved full conformity of our regulation with Basel standards.

This year we are going to undertake a major reform in national regulation, dividing all banks into three groups: systemically important, banks with universal licenses and banks with basic licenses, according to their size and business model. Regulation will be different for each size of the system, in order to help smaller banks to cut costs and focus on products for small enterprises and retail products, and keep the whole system stable and effective. Financial infrastructure Over the past four years we have significantly moved forward in developing national financial market infrastructure. We established Russian National Payment System, which now issues national payment card “Mir”, Russian National Reinsurance company, changed regulation for rating industry on order to make national agencies more trustworthy, by now two agencies have received the accreditation of the Bank of Russia. Finally, as the financial markets regulator the Bank of Russia is still in the middle of the process of establishing prudential regulations and control over different market segments. Now that the economy is returning to growth and inflation is approaching historical post-Soviet lows, how much further can interest rates come down, and how fast? These are the questions we are repeatedly asked by investors and other economic agents. There is no definite answer to these questions as the economic and market situation may change dramatically over time. According to our analysis, in a steady state equilibrium or neutral nominal interest rates will be 6.5-6.75%, with our inflation target standing at 4%. So, there is room for policy easing as our key policy rate is 9.25% at present. How quickly we’ll be able to reduce the key rate to its nominal neutral level remains to be seen. Its pace is not pre-determined. The Bank of Russia prefers gradualism in its policy. It’s better to move down by small steps, then significantly cut down the rate and then due to an unexpected shock raise it back. How many banks is the right number of banks for Russia? We are constantly asked this question too. We have been revoking about 100 licenses a year for the last three years, and what people really want to know is the number we are going to stop at. I should say that the pace of cleaning up is slowing, we’ve already got rid of banks which business models were built on dubious transactions, but still there are banks that falsify reports to the central bank and their true condition is about bankruptcy. We expect that we’ll still be quite active in revoking licenses for the next 2-3 years. But the Bank of Russia does not have any target for the number of banks. And I mean it. We want to have properly capitalized, efficient, both big and small banks in the Russian banking system. The proportional regulation reform that I’ve already mentioned is one of the measures we’re undertaking to help different kinds of banks find their competitive niche, to be profitable no matter what size the bank is. The right number of banks depends only on the needs of the economy. What is the likelihood that the Bank of Russia will start buying dollars to rebuild reserves if you see the oil price stabilising and no external shocks emerge, and do you have a timetable for this? The Bank of Russia announced rebuilding reserves to the level of $500 bln two years ago, but the actual buying of dollars stopped within 2 months after that, because of worsened situation in oil market. But we still think that increasing reserves is necessary. The uncertainty and volatility in global financial markets make it important for central banks to be prepared for any possible shocks. But anyway, we will purchase currency for reserves only if the market situation is stable and our operations don’t affect FX rate. Now we consider it possible to get back to replenishing reserves after we reach the inflation target of 4%. Russia’s capital markets have had some notable recent successes, such as Detsky Mir’s IPO on Moscow Exchange. Has Moscow finally come of age as an international financial centre, and what can the central bank do to support further development? Developing Moscow as an international financial center is a very important objective. Among other things, the success of this endeavor will depend on the development of the local investor base: pension funds, insurance companies, asset managers, mutual funds. The Bank of Russia has a medium-term financial market development strategy and will support such development. Besides, the Bank of Russia facilitates the development of financial infrastructure by reducing excessive regulations and filling in crucial regulatory and infrastructure gaps. At the meeting of G20 finance ministers and central bank governors you met with Mr ZHOU Xiaochuan, Governor of the People's Bank of China. What did you discuss, and how will it influence the work of the Bank of Russia’s recently opened office in Beijing? During our meeting with Mr. Zhou we discussed the development of our cooperation, the beginning of issue of RMB denominated Russian sovereign debt, some preparations before the issue starts. The Bank of Russia opened its office in China because we see quite strong interest from both Russian and Chinese financial institutions and corporates, and I’m pretty sure this interest will only be increasing in future. The office will provide expertise on regulatory issues and policies for financial institutions and investors. By the way, providing support to investors in Russian sovereign bonds is one of the tasks for the Bank of Russia office in Beijing. Finally — how has Donald Trump changed your life? As a central banker I focus primarily on the effects on monetary policy. When taking monetary policy decisions, we pay due regard to the changes associated with Donald Trump’s economic program. Donald Trump’s economic program was focused on fiscal expansion. This led to a fairly substantial increase in inflation expectations and US Treasury bond yields. Consequently, there is a greater possibility of accelerated normalization of the US Fed monetary policy. This could result in the US dollar appreciation; exert a downward pressure on oil prices and cause a capital outflow from emerging markets. EM A.M. is now on Facebook! Join the conversation on Twitter