23 Jun 2022

First Deputy PM Andrei Belousov: Govt, CBR need to keep overall goal in mind when rethinking economic policy

The consolidation of the ruble that has occurred over the last two months is becoming a real headache for the authorities, as the revenue of exporters, government revenue, and the competitiveness of Russian producers are falling.

The topic of what to do with the excessively strong ruble permeated all macroeconomic discussions at the St. Petersburg International Economic Forum (SPIEF) this year.

Russian First Deputy Prime Minister Andrei Belousov told Interfax in an interview on the sidelines of SPIEF about the optimal exchange rate for the ruble, how to achieve it, and what needs to be done to revive demand in the economy.

Question: One of the main topics of discussion at SPIEF and in general in the past weeks has been the consolidation of the ruble, which, outside of positives in terms of curbing inflation, poses tangible risks to the budget and the economy as a whole. This problem has various solutions up to radical ones such as reconsidering principle approaches to monetary policy and transitioning to targeting the ruble's exchange rate rather than inflation. What do you think, does such discussion have the right to exist?

Answer: Such a discussion is already underway both at the expert level and in government institutions. And it is related to the recognition of a simple contradiction. We do indeed now have a strong current account balance. And while before this current account balance was offset by capital outflow, today capital outflow is limited. Is this good or bad? From the point of view of the current policy of a floating ruble it's bad, because the ruble is strengthening, but from the point of view of the balance of savings and investment it's good. This is where the debate comes from. We have an investment resource forming in the country, and now we need to use it properly. Basically, this is what the government is working on now under the leadership of the prime minister by direct order of the president.

Second of all, in recent years, at least starting in 2015, a mechanism was established here that made it possible to ensure its sufficient stability under conditions of a floating ruble. Although, of course, the ruble's volatility did increase substantially after the transition to a floating exchange rate compared to what there was before. Nonetheless, the key element of this mechanism was, as you know, the fiscal rule, which thanks to simply automatic procedures established at the regulatory level made it possible to balance the ruble's exchange rate within certain ranges. Moreover, not by means of [money] issuance - this is very important. The Bank of Russia's options for managing issuance expanded, and accordingly, this was one of the cornerstones of the inflation targeting to which the Bank of Russia has transitioned in the past seven years.

Now this mechanism has virtually evaporated, stopped working. This is due to the blocking of the Bank of Russia's reserves and the automatic suspension or cancelation of the fiscal rule because of this.

In these conditions, of course, we need to rethink these processes, and by 'we' I mean the government and the Bank of Russia, as we are jointly responsible for monetary policy. But any rethinking needs to be done keeping in mind the overall goal - for the sake of what? This question - what for, why? - is key.

In this case, I believe that the answer to the main question - why? - is creating conditions for development, the creation of conditions for investment and growth of production, in the format of both the domestic market and exports. If you take the current agenda, this is first and foremost increasing domestic demand. If everyone agrees with this goal, with this objective, then we have room to jointly work out a new mechanism in which a place will also be found for a balanced exchange rate.

Q.: And what rate is balanced and which is optimal in your view?

A.: I would like to point out that these are actually different concepts. As concerns the optimal exchange rate, the more or less consensus opinion is that this is a rate in the range of 70-80 rubles per dollar.

A balanced exchange rate forms based on the balances that emerge on financial markets, on the currency market, and so on. We've seen recently that imports are growing, in part thanks to the efforts of the government. That is, we're gradually solving trade blockade problems. If at its peak the decrease in imports was 50%, meaning they fell by half, imports are now fluctuating in a range of around 65%-75% of the February level. That is, they have recovered about 20%-25% from the minimum level.

Of course, that's not the limit, we need imports to grow. But it must be understood that imports aren't just a question of the exchange rate. This is a question of domestic demand. Without demand, there won't be imports, and if there are no imports, accordingly, there will be additional pressure on the ruble in favor of its appreciation.

These are issues many of which lie in the Bank of Russia's area of responsibility, and we count on working together with the Central Bank here in the interests of realizing the objectives that I just mentioned.

Q.: How long can the exchange rate be at such excessive levels and how damaging to the economy might that be? When do you expect to reach the optimal exchange rate?

A.: The answer here is very simple - as soon as possible. But we understand that there are also constraints here on the part of inflation and restrictions on the part of channels for increasing domestic demand. I don't want to give quantitative estimates and forecasts, so as not to give rise to speculative expectations on the market. Nonetheless, I can say that this problem is being worked on in both the government and the Bank of Russia, and I hope that we will be able to solve it.

Q.: An opinion was voiced among others at the forum that the optimal key rate is in the area of 5%. What do you think about that?

A.: In principle, I agree that the optimal rate is somewhere at the level of 5%-6%, meaning the level we had before the inflation wave.

But we should understand that the rate mustn't be changed too suddenly, because the Bank of Russia's key rate is a reference point for financial market players, and expectation of changes in the rate is a very important factor in their behavior. Evenness and predictability are important on this matter. But movement within those parameters, those reference points, I agree with them in principle. And we're seeing that the Bank of Russia is moving in this very direction.

Q.: Your position on the whole is that monetary policy and fiscal policy should work in concert in the interests of faster rates of economic growth? So that growth is, if not then main priority, then at the very least on par with inflation? How do you assess the current economic dynamics and the prospects for next year?

A.: First of all, monetary policy is an area of joint responsibility of the government and the Bank of Russia, given that the Bank of Russia is independent in its actions and this is enshrined in law, and the Russian government's attitude toward this fundamental principle is unwavering respect. All the same, this is an area of joint responsibility.

Second of all, as for priorities, the importance today of the very factor of economic growth has grown dramatically, since the national goals that the president set are an expression of the interests and expectations of society, of people. Solving the issues of poverty, demographics, quality healthcare, quality education, roads, the environment, housing, and growth in household incomes - achieving these goals without economic growth is impossible, that's obvious. The economic resources that only growth provides are needed for their realization. Therefore, growth in this sense is imperative. The question is when we will be able to transition to economic growth and on what scale given the restrictions that exist today.

As for the current year, the estimate the Economic Development Ministry has given for this year, roughly -8% [the current official ministry forecast is a decline of 7.8%], I would say, is the maximum in terms of the depth of the drop.

Based on calculations and those processes that are currently unfolding in the economy, I think that the drop will be less, somewhere in the range of 3% to 5%.

There are several conditions in which the drop will be in this range. The most important one is growth in domestic demand. If there is no domestic demand, that would mean that we'll get about the drop that the Economic Development Ministry is currently forecasting. If we manage through the joint efforts of the Bank of Russia and the government to awaken domestic demand, activate it, then we can get a drop this year, I think, in those proportions that we're talking about right now, around 3%-5%.

As for next year, I think it's about zero value, that is, a dynamic of about zero. But statistically, there could be a slight minus, inasmuch as we had a very successful first quarter this year, and there was double-digit growth of 12.8% [year-on-year] for investment and fairly high growth of 3.5% for GDP, so there will be the effect of a high base.

A.: You said that the main factor for growth in the current situation is activating domestic demand. Can you list three or four primary measures that in your view need to be additionally realized in the near future to support demand?

Q.: Today, very important measures, both tax and regulatory measures, are aimed at investments. The regulatory measures are especially important, as investors should be given the opportunity to invest in the country safely, at least in terms of risks.

Measures related to the preservation and expansion of export markets are also important. First of all, this concerns non-commodity and non-energy exports. Reorientation of transport and logistics routes is currently underway; this, among other things, contributes to the preservation and expansion of the country's export potential. We have very good opportunities here. And a very important objective is, of course, the dynamics of the ruble's exchange rate - this is a key point.

The third point. Third numerically, but probably first in importance is consumer demand and real household earnings. I believe that we must act quite carefully here, but we have to act nevertheless - to more actively support the socially vulnerable population. Including, if we take the economy, in order to stimulate consumer demand. Consumer demand for food products is at the same level in real terms, with no particular decline and dynamics somewhere around zero, which can't be said about non-food products. This can also be explained, it's understandable, but we need to get out of this situation quickly.

And of course, we must not forget the presidential decree stipulating that the growth of state employees' wages must be no lower than the national average. We need to keep strictly to this principle, as well.

Another measure, a key issue, is unblocking loans. Today, for a variety of reasons, bank lending to the economy is sluggish. We have to give credit to the Bank of Russia here, it went to the length of easing regulatory restrictions to an unprecedented level, and in conjunction with a decrease in the key rate, of course, that should have an effect.