Financial analyst, Alexander SINELNIKOV, answers our journal’s questions.
— Mr Sinelnikov, how do you assess the efficiency of the current policy for the financial industry regulation, in particular, the Central Bank’s measures for the inflation targeting?
— As far as the law on the RF CB in the current edition is concerned, the criterion of the rouble stability is the price steadiness which is directed, among other things, at forming the conditions of sustainable economic growth. Such formalization of the criterion replaced the understanding of stability as purchasing capacity determined by the rouble exchange value against a basket of dollars and euros.
The understanding of stability (via purchasing capacity) lay in the basis of both strict policy of the rouble's peg to foreign currency which ended in the default of 1998, and quite successful policy of the price currency band.
With the change of stability criterion the policy of the CB also changed – now they are pursuing a line for the so called inflation targeting. And if the CB manages with the monetary component of the inflation the policy, to their opinion, is efficient.
— And do they manage?
— Let’s consider the results. The dollar contents of the rouble has fallen by 50% for the last two years. Honestly speaking, I am not a specialist in the methodology of calculating average inflation. I am counting inflation according to my own consumer basket.
For example, as many Muscovites, I use my car every day. The price of fuel has grown by 20%, meanwhile the world price for hydrocarbons have declined three-fold. And when I go on a business trip abroad, I buy a ticket for an “Aeroflot” flight, the price of which is nominated in euro – so, it has grown by 100%.
Thus, the range of “my” inflation constitutes from 20 to 100%. Everybody has his own basket, but the result does not differ much from mine. And as judged by my own expenses, I do not evaluate the current monetary policy high, as my own consumer basket has got much more expensive.
— And not only yours… Now please, comment on the recent key rate decrease by the CB. Analysts assess this event differently. What do you think about it?
— Before speaking on the key rate decrease, let us start with the CB’s methods of its determining. I think it to be adequate. I have already said once that the policy of inflation targeting in Russia and free exchange rate forming has led to the situation when the national currency volatility related to the foreign exchange basket makes 20% according to the CB’s annual report of 2015.
And if the volatility is 20%, the key rate (which is called riskless rate) is to be at least half of it. So, the key rate of 10-11% is the derived result of the market volatility.
If the CB starts decreasing the key rate even lower, it will cause the burst of blackmarketeering and the growth of the dollar rate against the rouble, what we saw in December, 2014. It is important to say that the CB is often in dual state: it has to sell dollars on the exchange to stabilize the rouble rate and at the same time to sell roubles to the banks to stabilize the liquidity of the banking system. To prevent from the conflict of these two oppositely directed, simultaneous impacts on the market, the CB is to take the most precise market position.
At the very beginning of the currency crisis, the first signs of which appeared in July, 2014, the regulator declared leaving the exchange market (and it did so) for the shift to a free float. But at the same time it stayed on the market “from the other end”, delivering rouble liquidity to the banks. By October, 2014, the rouble volatility had achieved 20%, besides, oil price fall occurred on the world markets, and repurchase agreements with banks were concluded at the 8% rate.
— But this is non-market activity…
— Exactly. In this case there appears the so called riskless arbitrage on the financial market: when the key stakeholder, the CB, behaves in non-marketable way delivering liquidity at non-market price. It is clear that black marketeers will start using this discrepancy.
Following the volatility, currency option bonus becomes higher than the cost of liquidity support (that is, key rate), and it results in the sharp growth of the futures dollar rate against the spot rate. That’s what we have seen.
If in 2014 the management of the Russian national currency rate was inadequate (putting it mildly), at present the CB key rate is determined quite rationally. Another thing is that the CB does not take any measures to decrease the volatility of the national currency, and it is the reason of all troubles, including the ones in the construction industry.
— And why does not the CB take these measures? Is it gainful for it to multiply profiteers?
— No. It does not multiply profiteers. Just the opposite, having established such a high key rate, the CB overcame the blackmarketeers. Today the riskless arbitrage I’ve spoken about is impossible.
Profiteers being the market regulators of economic processes always have risks. But their risk and profit on the Russian financial market are absolutely sensible and rather low today. Thus, in this case, the CB got over profiteers…
— …but it seems to have got over the Russian economy, at the same time. And what’s the result? There are no profiteers, but there are no producers either. Neither friends, nor enemies…
— That’s the thing. With such volatility, cost-effectiveness of exchange financial operations is much higher than the profitability of goods and services production of non-financial economy sectors.
— Why has this thing become possible?
— It is the result of inconsistency of the CB and ministries’, included in the financial-economic unit of the Government, activities and wrong CB’s targeting
If you read carefully annual reports of the CB and listen to the explanations of its directorate, you will see, that the CB has clearly determined its zone of responsibility as monetary inflation.
[quote]A. Sinelnikov: «At present the CB key rate is determined quite rationally. Another thing is that the CB does not take any measures to decrease the volatility of the national currency, and it is the reason of all troubles, including the ones in the construction industry»[/quote]
But as it is, the monetary inflation is only one of inflation sources. And there are two inflation sources not covered by the CB’s regulation.
First of all, it is a non-monetary inflation — the inflation of expenses. It includes constantly growing tariffs of natural monopolies coming into the zone of Ministry of Economic Development and Federal antimonopoly service’s responsibility.
And the last but not the least source of inflation is the so called imported inflation. That is the inflation imported with the delivery of goods and services from abroad and fully determined by the national currency rate.
As the CB’s policy is to refuse managing the rouble rate, this kind of inflation contributes most to the growth of prices in the economy, which is not isolated from the world markets of goods and services, and due to two-fold devaluation of the national currency added dozens percent of growth to the general price pattern.
In the result, the struggle against the monetary inflation via money supply restriction and its cost increase without simultaneous volatility control, or, in other words, rate stability, led to a vast accumulated inflation and economy decline.
From my point of view, monetary sphere regulation cannot be based only on one parameter, i.e. inflation, and by one state authority, i.e. the RF CB, which does not even coordinate with other state authorities.
A complex program on balanced monetary policy is needed, and we do not have it, because everybody is responsible for his own part of work. We are to work out a system policy both in monetary sphere and in the economy on the whole. .
— May it be done on purpose? May we all work according to the IMF’s receipts, as a number of economists think, saying that the IMF Chart is more important for Elvira Nabiullina, Head of the RF CB, than the interests of Russia.
— Well, I think, if we really worked according to the IMF receipts, we would have lived quite differently. Read the annual report of the CB, there is a very important chapter: «Foreign-currency and gold reserves management»/ In 2015 losses of this portfolio management totaled $19 bln due to the rate negative revaluation.
What is it connected with? The portfolio in which our money is invested comprises 57% weak against dollar currencies, and for the two years when these currencies were going weaker, the CB did not reform the portfolio.
And if the CB were really managed by IMF, the situation would be much better than it is. IMF experts would prompt the CB Board to store 65% of the portfolio in dollar assets, and 35% - in weaker currencies, as they do it for themselves. And if our FX reserves were managed by the IMF and our specialists followed their advice, I’d be grateful to them. But they do not do it! And so our great losses. Taking into account 2014—2015, we lost about $50 bln only via forex reserves revaluation.
— Thank you, Mr Sinelnikov. Next time we would like to hear your evaluation of the banking business current model prospects.
Andrei CHERNAKOV