CBR First Deputy Governor Vladimir Chistyukhin: Financial market needs an inner conviction that it is not necessary to do everything in six months
Photo: Central Bank
The Russian financial market has gained plenty of experience of working under stress in the last three decades. There have been fewer relatively prolonged shock-free periods in its recent history than there have been crises of varying degrees. But all these look like mere blips when compared to last year's perfect storm. Western sanctions and retaliatory steps taken by the Russian authorities have not only reshaped infrastructure, but they have affected the fundamentals of the market, transforming it in the space of a few months. Central Bank First Deputy Governor Vladimir Chistyukhin tells Interfax in an interview about what steps the regulator has taken in response to the events that have unfolded, how its prompt action has worked out and what tasks the Central Bank has for the future.
Q.: The Russian financial market has been living with the logic of responding to external events and challenges for a second year now. It is difficult to call this a state of development and here there are probably other things to worry about apart from long-term planning. At least it appears so from the outside. Or is this a misconception? Can certain elements of a long-term strategy be implemented now, in parallel with the solution of numerous problems with settlements, assets, and infrastructure?
A.: The events of February last year forced us to respond quickly and put the management of many projects and processes into manual mode. Obviously, this approach is by no means systemic. But despite all the difficulties, the medium and long term tasks still stand. As early as August last year, we released for public discussion a consultation paper titled "Financial Market: New Challenges in Modern Conditions," the key provisions of which were included in the Guidelines for the Development of the Financial Market in 2023-2025.
Strategic planning for us has been split into two tracks. The first is related to our actions in response to new challenges. We introduced a lot of regulatory forbearance to protect the financial market last year. And we had to determine how to exit this mode. On the one hand, it is important to ensure the stability of professional financial market participants, primarily banks, but on the other hand to leave room for them to develop lending and boost the economy.
In addition, currency controls were introduced to limit capital outflows and ensure financial stability. The question was to what extent the restrictions should be maintained. For example, now there is no longer the mandatory sale of foreign exchange earnings, although we still have the potential right to introduce it quickly.
Reporting by financial and non-financial organizations was closed. We had no choice but we were well aware that it is extremely difficult for investors and creditors to work without information. Now the process of information disclosure has begun - the Bank of Russia has taken the relevant decisions on financial institutions. We face the task, on the one hand, of getting as close as possible to pre-crisis mode, and on the other hand, to protect from sanctions pressure Russian companies that continue to supply products to foreign markets or provide services there.
In international settlements there is now a pivot to the south and east, and we must build a clear network of payment and settlement relations with new partners.
Another important factor: the freezing of assets of Russian residents and restrictions on the assets of non-residents from unfriendly states. This is also the new reality, and we need to understand how to live with it in the future.
We also need to develop our own infrastructure, and benchmarks for financial and commodity instruments, because, unfortunately, traditional channels - Bloomberg, Reuters - have stopped working in Russia. We need to continue to develop our rating agencies because the Big Three have left our market. We need to support and develop the auditing industry, given that the Big Four no longer provide services here.
All these changes are long-term in nature and require not one-off but systemic solutions. This is an enormous challenge.
Q.: And what’s the second track?
A.: It’s those strategic areas that we pursued before. They have on no way become any less important, indeed they have become more important.
Consumer protection and financial literacy. In times of crisis, this is one of the priorities.
Digitalization. The basis for the financial market’s development and, to some extent, integration into the international financial market. Without significant efforts here we can hardly expect to maintain our leadership in banking.
Sustainability and ESG. Today it may seem that there are more pressing issues, but we are working closely with friendly countries, and sustainable development is a crucial topic for them. They continue to introduce various elements of green finance. If we do not want to lose some of the value of our non-green exports in the future, then we need to keep up with those countries today and continue to develop infrastructure and tools.
Long term financing. This task was set before 2022. Much has already been done here, but much remains to be done.
Q.: If we look at the first track a little. Import substitution is possible for some things, but the financial market in this sense is probably even more challenging than industry. Take audit, for example. You cannot buy this service in friendly countries where that same Big Four that left Russia operates. Is there a risk of losing key competencies here? Is this a significant problem for our market?
A.: We have been implementing International Financial Reporting Standards and International Auditing Standards for several decades and continue to implement them. Despite the departure of the biggest names from our market, teams with competencies and expertise and models of ethical conduct, based on best international practices, remained. Our task is to ensure that the companies that remained not only do not lose the potential they have built in this segment, but also continue to increase it. Today that potential isn’t bad at all.
The auditing industry is in the process of reforming, the relevant legislation has been passed. For example, those companies that will audit the annual statements of financial companies for 2024 and provide audit services to financial companies from January 1, 2024 will have to go on a special Central Bank register. And this is no formality but a full inspection - including with site access - of processes, procedures, teams, of how all the activities of an audit firm are organized.
In addition, it is important that an auditor’s opinion is recognized not only within Russia, but also by our international partners with whom we are interacting today. And such work is already underway. It is necessary in the event a Russian company places an issue of securities abroad or raises financing from a foreign bank, in which case it will need an auditor’s opinion. Conditions have changed, which means that we need to create our own infrastructure and define criteria that meet international standards.
I agree that often it was Western practices that were for us a kind of benchmark on which we relied. It was Western investors who motivated us to disclose information more fully, improve corporate governance and implement better audit models. But it is not something that cannot be replicated and continued is there is the will to do so.
Q.: Is this also a challenge for regulators? Previously, this market was probably more lucid, and it was easier to oversee it...
A.: This is a challenge for us, for the Finance Ministry, and, most importantly, for the audit community itself. Currently, there is one self-regulating organization in this market, and it has to implement best practices, ethical standards, and resolve issues of the independence of auditors. Obviously, much depends on the community itself.
Q.: The second track is what was in the pipeline before February 2022. The issue of regulating financial groups and holdings was being actively discussed in 2021. Then it went for revision. Are there any plans to return to it? Or is this a long way off with more pressing matters to take care of?
A.: No it’s not a very long way off. The project was taken off the priority shelf but has not gone away in terms of strategic importance and long-term planning. Legislating for the regulation of non-banking groups and holdings is very important. Those best practices that are now enshrined in banking legislation and, most importantly, in banking supervision - looking at the bank not as a separate unit, but as part of a group of affiliates and evaluating a bank on a consolidated basis with its affiliates - are a very important element of good quality supervision. We need to do exactly the same with respect to non-credit financial organizations: insurance companies, non-state pension funds, professional securities market participants.
We realized that in 2022 and early 2023, professional market participants were fully occupied with the current agenda, and we did not want to introduce new system-wide regulation when the market was facing top-priority tasks at which all forces were being thrown. But we will monitor the situation, and I am sure that we will return to this bill either at the end of 2023 or at the beginning of 2024. In any case, if it is adopted, the subjects that fall under it will be given a meaningful transitional period to implement this system.
Q.: What do you mean by a meaningful period?
A.: Several years. It’s like when we implemented the equivalent of Solvency II for insurance companies. The process was extended over five or six years: new requirements were introduced step by step. I think there will be a flexible mechanism here, too.
My experience tells me that a planning horizon of one or two or even three years is a very short horizon. Time flies so quickly that when you put something off for five or seven years, it actually happens tomorrow. And it's not that long. In our financial market, you need an inner conviction that it is not necessary to do everything in six months. Some things need to be done over several years if they are going to be done well. And nothing will actually change, except that they will enter reality more shipshape and systemically, without any shocks.
Q.: Central Bank Governor Elvira Nabiullina said in December that the disclosure of corporate information should return to normal from July 1, with certain exceptions. What exceptions?
A.: The issue of exceptions to the disclosure of information by securities issuers is a matter for the government. We take an active part in the decision-making, but this is regulated by a government decree.
At our level, we have already made a decision regarding the disclosure of information by credit and non-bank financial institutions. An option is being considered where after July 1 of this year Russian nonfinancial companies will have to resume the regular disclosure of information about themselves. Our approach is as follows: information is disclosed according to the general rule, but there are some exceptions. This is to do with sensitivity to sanctions pressure. Foremost this refers to beneficiaries, ownership structure, group structure, largest counterparties and information, the disclosure of which could inflict significant harm on the company, management or owner in the current circumstances. To this we can add information about what a company produces and what markets it operates on.
We have voiced our proposals to our colleagues in the government. Discussions are now underway on the limits to which exceptions are possible. On one hand, companies are asking to push this limit as much as possible toward nondisclosure, because they fear western regulators will make things worse for them. But on the other hand, the stock market cannot live without disclosure of information, creditors, investors, rating agencies cannot exist, it is impossible to assess how companies function. And this means we have some kind of pseudo-market relations and securities placements, and this does not encourage fair competition and the development of capital markets and debt financing.
Q.: The initiative for some closed areas, closed circuits for disclosure has not taken off?
A.: It's not clear how this would work. We want a retail investor to come in and buy bonds or shares in a company. They cannot access the internal information of this company, but they can rely on ratings, information from analysts, which is provided to them by their own brokers, their bank. If this is a closed resource, then how will the investor have access to it or the opportunity to get information from it? And who will decide who has access and who does not? This would be an unequal, selective approach. It’s not how the market works. Theoretically, you can do something artificial, but it will be a non-market evolution, and non-market evolution is always very dangerous.
Q.: Recently, the disclosure of non-financial reporting returned to the public agenda rather unexpectedly...
A.: It came as a surprise to you, but in 2021 we issued recommendations on the disclosure of non-financial reporting for public joint-stock companies. It remained on our agenda in 2022 as well - we even devoted a separate chapter in the Review of Corporate Governance Practices of Russian PJSCs to this issue. This is still a topic for this year. Just a low-key one.
Q.: Whatever the case, the president backed the disclosure of non-financial statements. Should we expect that the bill, which has been discussed for more than one year, but was postponed, will nevertheless be adopted?
A.: The sustainable development and ESG agenda can be divided into three parts. The first is the creation of the necessary infrastructure, that is, taxonomy, verifiers and organized platforms where the relevant instruments are traded, including carbon units.
The second is tools. We have introduced many different instruments, including green, social, adaptation bonds, sustainable development bonds, climate transition bonds, and a carbon unit has appeared.
The third is, effectively, regulatory methods: incentives for companies that are still lag far behind on sustainable development, or, conversely, penalties for those who have already joined the agenda, but do not meet the requirements.
The first two continue to be implemented at the same pace as before, and the third has been suspended, because incentivizing will be a financial burden on the budget, and companies will pay a penalty. Considering that both the Russian budget and the budgets of companies have borne a significant additional burden since February 2022, it probably makes sense to postpone the introduction of the third element slightly. Not to forget about it, just move it back.
As for the bill, work on this following the president’s instructions will most likely resume. We played an active part in the discussion of the text of the document. It is clear that this work will continue.
Q.: Let’s go back to the strategic priorities. One of them is the launch of a long-term savings program for citizens. The current stock market situation is one of heightened volatility, nervous reaction to news about dividends or the lack of, and so on. Are these the right conditions for launching such a program? Maybe we should wait for the market to recover or stabilize?
A.: There’s never a perfect time. Stock market instruments began to develop around 2010 or even earlier, during the times of the Federal Commission for the Securities Market and the Federal Financial Markets Service. And only in 2017-2018 did this system take off. Individuals and institutional investors were not happy with low returns on deposits and started to buy primarily debt securities, and those with a slightly higher appetite for risk bought shares. The system began to develop actively. We saw a boom in brokerage accounts: 7 million, 20... Yes, a lot of them were empty, but the process was still launched.
The same goes for the long-term savings program. On the one hand, the economy needs long-term resources, and on the other hand, there are serious constraints. First, foreign investors, who made a significant contribution to the stock market and the capital market, have left us. Secondly, the budget has its limits. All budget expenditures are planned to the kopeck, and it is impossible to obtain additional resources from anywhere without a threat to macroeconomic stability.
In this situation we have to encourage both supply, getting issuers interested in raising either capital or debt; and demand, the investor, putting additional conditions in place, attractive instruments.
These instruments include Individual Investment Account-3, expected to run for a transition period of at least five years, and 10 years for the main period. Compared to current non-state pension provision, which is also long term, it brings significant tax incentives for citizens like investment tax rebates or exemption from capital gains tax; as well as the opportunity to withdraw money ahead of schedule in certain socially significant cases.
Then there is unit-linked life insurance. In this case, the policyholder receives a list of mutual funds, and they choose which one to invest in.
The third tool – we think it is essential to develop non-state pension provision, effectively turning this into long-term savings for old age. It calls for co-financing by the state, tax rebates and the opportunity to use compulsory pension insurance savings as a down payment.
I hope that this will be an additional incentive both for citizens to save with non-state pension funds, and for the funds themselves to develop.
Crucially, from 2015 to 2019, a huge amount of work was done to clean up funds from low-quality assets. And today I can say for sure that even in the turbulence that exists in the market, the funds do not have any "holes" and can honor their obligations well.
These three elements will provide more options for our citizens who want to invest in a long-term one. Here it is important to resolve the issue with at least some of the frozen assets of individuals. But much here depends on foreign regulators.
Q.: There are practically no initial offerings of shares by Russian issuers on the market now. Can the regulator do something about this, in addition to measures to improving the investment climate as such, or is it just a matter of waiting patiently until both issuers and the market are ready for placements?
A.: In the near future, companies face the important question of where to get resources to invest in development or to service external debt. The budget is limited, and nothing can be raised abroad. Our opinion: continue to raise funds here. Yes, to some extent it will be debt financing. In our country, this has been developing quite well, about 20% of borrowings are not bank loans, but public debt, which is not bad at all. And the measures that have already been mentioned, which are aimed at developing the potential of institutional investors, forming a pool of long-term money – these will also facilitate the entry of new companies into the capital markets, which must have depth and liquidity.
Q.: And things aren’t too bad in this segment right now.
A.: It will continue to develop. But some companies, primarily medium and small ones, will be prepared not only to raise debt, but also to issue stock, ridding themselves of the necessity to repay loans in the medium and, possibly, long term.
Today there is a special incentive program for small and medium businesses. We want to roll it out further for the so-called fast-growing high-tech companies, so that they have more opportunities to enter the organized capital market and conduct IPOs. These are issues of consulting support, and compensation for their expenses related to the issue.
Tax incentives are always a significant factor. This is also being discussed, but no decision has been made yet. Again, the budget is limited, we have to be very careful about what we spend.
Let's look at the volume of shares that leading Russian companies have circulating on the stock exchange. On average, today this is about 32%, but looking at companies individually, some have 10%, and some have almost nothing on the market. The situation is different abroad. About 50-80% of shares are in circulation there. The most basic calculations show that if our companies increase the market share in circulation by at least 3 percentage points to 35%, this would make it possible to raise more than 3 trillion rubles. And if the share of shares in circulation reaches 50%, this could be almost 7 trillion rubles. This is effectively an additional investment resource that can be put towards the development of your own long-term projects.
It so happens that a significant part of our economy consists of companies with state participation, and the state as a shareholder plays an important role in their strategic decisions. Maybe it makes sense to think and incentivize them to place additional shares on the market instead of attracting funds from the budget.
Q.: Incentivize them?
A.: Yes. There is such a means as a directive from the shareholder - the state – for incentivizing state-owned companies. The shareholder can discuss this issue and refer the company to the financial market to raise capital. For other companies, the issue of entering the stock market is a matter of balancing the interests of shareholders and investors. A deal has to be profitable for both. And here you don’t have to start right away with 50% - it’s easier to go up from 32% to 35%.
Of course, if we look at each company separately, we will see that the situation may be different. But there is not a blind alley, there is potential here, and it must be used.
Q.: What are the results of the process of converting depository receipts? Are there any estimates of what proportion of receipts has converted, and what will happen to those that were not converted into Russian securities?
A.: If we give an overall assessment, then last year Russian holders actually got back the opportunity to dispose of their securities. Decisions were made that, without changing the ownership structure, eliminated the foreign accounting infrastructure that blocked any movement of securities. We are talking about the automatic conversion of depositary receipts, which were recorded in Russian infrastructure. The procedure was completed in September, and as a result, shares of Russian issuers with a total value of about 188 billion rubles were credited to the holders' accounts.
In addition, mandatory conversion was carried out. This concerned cases when depositary receipts were recorded in foreign depositories that impeded transactions. This procedure ended a little later, in November. Some 175 billion rubles of shares were credited. So assets totaling over 360 billion rubles have actually ended up on the accounts of Russian owners.
We also had a program for Eurobonds, during which about 1.1 trillion rubles were either transferred to Russian accounts or substitute bonds were issued for them.
From my point of view, these measures justified themselves, they worked. Perhaps not all specific situations have been taken into account. The possibility of reconverting, as well as other measures in order to localize foreign-registered securities, within the Russian infrastructure are currently under discussion with the Finance Ministry.
Q.: Are there any technical channels of communication with the regulators of unfriendly countries?
A.: Such channels are practically non-existent with unfriendly regulators. What remains is interaction through major international organizations, such as the World Bank, the International Monetary Fund, on the platforms of which the central bankers and finance ministers gather and discuss various issues.
We constantly discuss the widest range of issues with friendly regulators.
Q.: A draft presidential decree on the mandatory replacement of Eurobonds with Russian bonds is currently being discussed. Has the Central Bank approved it? Are you satisfied with the configuration proposed by the Finance Ministry?
A.: We have fundamentally agreed on the configuration. We support the obligatory nature of 'substitute' bonds; however, we are also certain that there should still be a framework for specific exceptions. Practice shows that each situation is unique; each matter is unique; the conditions are unique; and the location of the company in the international space is. There are cases when a mandatory issuance of 'substitute' bonds could do more harm than good.
Q.: But doesn't this ultimately debase the principle of obligation? An issuer who does not want to replace Eurobonds applies to the sub-commission, which allows...
A.: No. The sub-commission has acquired vast expertise and is so conservative in its decisions that you’d have to try very hard to prove which of the two evils is greater - opting for substitution or remaining in the past paradigm.
Q.: At the end of the year, the Finance Ministry came up with a proposal to unify mods for making payments on Eurobonds and federal OFZ bonds to non-residents, so that payments on OFZs would accrue on Type C accounts, but would be paid to all investors, regardless of ownership, as is now the case with Eurobonds. How does the Central Bank evaluate this proposal? Does it support it?
A.: Unfriendly nonresidents can conduct certain transactions with yield on OFZ as it is: they can buy other securities, make certain mandatory payments and pay taxes...
Q.: Yes, but it's all in a closed circuit.
A.: Yes. And in my view, the time has not yet come to relax these accounts.
Q.: So you still need to build up an "exchange fund"?
A.: Yes, because today we are seeing, unfortunately, an increase not only in sanctions pressure, but also in confiscatory pressure. And of course, we need to keep some protection in the form of this kind of "fund".
Q.: And how much has already accumulated on Type C accounts?
A.: We do not disclose this figure, but it is growing. The amount continues to grow.
Q.: The sanctions have caused a lot of difficulties in corporate governance, starting with the necessary composition of the board of directors. How long will this issue remain on the agenda?
A.: On the one hand, corporate governance seems to me to be a key element in running a successful business. On the other hand, unfortunately, as soon as difficult times come, those companies that had problems in this area are the first to abandon it. On the contrary, those whose corporate governance was built using best practices have been able to deal more effectively with the problems associated with the turbulence of recent times. In any case, we are in favor of returning step by step to the classic corporate governance regulation that existed before February 2022.
But we realize that the road will be long and difficult. It is very hard to find independent directors at a sanctioned company. And this applies not only to foreigners, but also to Russian independent directors who are wary of sanctions pressure. So we have given companies the opportunity to adapt to the changed conditions without downgrading their listing. For sanctioned companies, this period was extended until the end of shareholders' meetings devoted to 2023 results.
Another important issue is the holding of absentee and remote meetings of shareholders. So far, the rule on holding meetings in absentia has been extended to 2023. But now the issue is being resolved in order to introduce a more advanced type of shareholders meeting - remote, and entirely electronic.
Q.: With a simple electronic signature?
A.: With a simple electronic signature at the initial stage. The bill is being finalized legally and technically and I think it will come out. But then the question will still arise what will happen after the end of the transition period. I think that in the future it will not be possible to retain the simple electronic signature, it will be complicated. In this case, a new problem will arise - access for foreigners. Foreign investors are important to us, and we have them, including from friendly countries. The level of confidence of foreign investors must be maintained. So the issue will have to be resolved: in what form meetings will be held and how foreign shareholders will get access to them. There are a number of questions for which there are no ready answers yet, but they will definitely need to be sought. Otherwise, you will not build a first rate financial market, but this task is before us.