Interfax: Russian central banker says economy can withstand lower oil price, sanctions

Elvira Nabiullina file photo

(Interfax – November 18, 2014) The head of the Russian Central Bank, Elvira Nabiullina, has said that the economy would retain stability if things go less than well, i.e. if oil prices averages 80 dollars per barrel and sanctions continue until the end of 2017. Speaking in the State Duma on 18 November, she added that Russia’s financial system was much better prepared for significant fluctuations of oil prices than in the past.

Nabiullina said that there was no meaningful alternative to a free-floating rouble but did not rule out irregular interventions to deter speculators. She also suggested that one should measure the stability of the rouble not so much in terms of its exchange rate but mainly in terms of inflation, which she said could come down to the long term target of 4 per cent within three years.

No alternative to free-floating rouble

“In our view, at present there is no effective alternative to a free-floating exchange rate,” RIA Novosti news agency quoted Nabiullina as saying.

“Maintaining the exchange rate does not eliminate the objective problems, first of all the falling oil price. Maintaining the exchange rate would require a significant spending of the reserves and substantial restriction of rouble liquidity, which would mean much more significant increase of the interests rates in the economy than now, which, in turn, would lead to the contraction of lending to the real sector, first of all in the areas of import-substitution,” she said.

In addition, there could also have been problems with liquidity on the money markets and the stability of the banking system could have been reduced, she said. “Also, at some point one would have been forced to let it go free and do it more sharply,” RIA Novosti quoted her as saying.

Irregular interventions to prevent speculation still possible

Nabiullina said that despite the Central Bank’s decision to allow the rouble exchange rate to float freely, irregular interventions were still possible, editorially independent Ekho Moskvy radio reported.

“When taking this decision, we retained the right to make irregular interventions if we see that the situation on the currency market creates threats to financial stability. We will leave to ourselves this right, including in order to prevent speculators from lining up. On the other hand, managing the exchange rate and trying to maintain some kind of exchange rate target is absolutely impossible in the current circumstances, in the situation the Russian economy is, with its still continuing dependency on oil price and so on. It is impossible to take on fundamental global factors,” Nabiullina said.

Economy to retain stability even if thins go less than well

“We developed five scenarios that vary in terms of the dynamics of oil prices and the duration of sanctions. I would like to tell you that even in the event of not the best development of events – average annual oil price of 80 dollars a barrel and the sanctions being in place until the end of 2017 – our economy will retain stability and we can achieve the fall of inflation to 4 per cent on the timescale of three years,” Nabiullina said in the State Duma.

Financial system now much better prepared for fluctuations of oil prices

Nabiullina said that compared with past years, Russia’s financial system is now much better prepared for significant fluctuations of the oil price and other adverse external factors, Interfax reported.

“In the past years when there was such a fall of the oil price and after this a fall of the rouble exchange rate, this was often accompanied with problems in the financial markets, defaults, margin-calls and liquidity crises. Now financial markets are stable, the banking system continues to function as normal and this means that our financial system is now much more stable than it was in the past years, much better prepared for significant fluctuations of oil prices and other negative external factors,” she said in the State Duma.

Stability of rouble should be measured not only by exchange rate but by inflation

Nabiullina said that ensuring the stability of the rouble was a constitutional task of the Central Bank “but, in my view, one should stop measuring this stability only in foreign currencies – how many dollars one can by with a rouble. For people it is more important how many goods one can buy with a rouble. Stability is first of all the purchasing power of the rouble, this is low inflation”. Interfax also quoted her as saying that it was possible to reach inflation of 4 per cent within three years and noted that the Central Bank expects the inflation to be in the region of 6.2-6.4 per cent in 2015.

[featured image is file photo from past event]