12.03.2015 – Gaidar Readings in Nizhny Novgorod

On 12 March, the city of Nizhny Novgorod hosted Gaidar Readings titled Current Economic Policy Challenges and the Banking Sector's Development at the Federal and Regional Level (As Exemplified by Banks in the Volga Federal District).

Executive Director of the Gaidar Institute Sergey Prikhodko acted as moderator of these Readings. The session was opened by Deputy Director of the Nizhny Novgorod Institute of Management (RANEPA) Svetlana Tikhonina, Minister of Economics of Nizhny Novgorod Oblast Gennady Balandin, and representative of the Plenipotentiary Envoy of the President of the Russian Federation to the Volga Federal District.

Scientific Director of the Gaidar Institute Sergei Drobyshevsky in his presentation titled 'Factors Behind the Crisis Phenomena in the Russian Economy and the Current Economic Policy Challenges' explained the differences between the current crisis and the previous ones – of 1998 and 2008.

In 1998, the crisis was caused by the government's inability to provide financing for the servicing of its debt, which was very costly. The situation improved in early 2000 in response to rising oil prices, followed by economic growth. In 2008, a number of crisis phenomena emerged in connection with a worsening global economic situation – economic decline in the developed countries pushed down the demand for Russian exports. As a result, in 2009, the downfall of Russia's economy was steepest than that of any other economy in the world, which can be explained by it having been overheated on the eve of the crisis. However, just as it had happened in the early 2000s, oil prices later in 2009 began to soar, and so the economy on the whole could survive the crisis rather painlessly. However, the window of opportunity opened by the crisis was not properly taken advantage of, and no restructuring of the national economy was undertaken.

The current crisis differs from the previous ones in that now we can observe the overlapped effects of several negative factors. The first factor is the increasing inefficiency of the economy coupled with rising risks of doing business in Russia and the absence of any serious incentives for developing enterprises therein. As a result, the fundamental rate of the economy's development began to slow down as early as 2012. Even without the additional factors of falling oil prices and complicated geopolitical situation we could observe zero rate of growth.

The second factor is the low price of oil. The downward movement displayed by oil prices has become more of a structural phenomenon – this is by no means a short-term decline, we may now even speak of a reversal of the previously observed trend. This is the new reality that we will have to deal with for years to come. As a result, the input of the oil and gas sector to the national economy will be shrinking.

The third factor has to do with economic sanctions and the rising geopolitical tension. The impact of sanctions can be visible not only in the capital shortages experienced by Russian companies, but also in the increasing lack of trust in the Russian economy's ability to ensure appropriate conditions for doing business, which translates itself in the slower implementation and postponement of the launch of many projects.

So, the bulk of these factors are beyond the government economic departments' control. The government can only create helpful conditions for playing down the effects of all these negative factors and for promoting private business activity.

Pavel Trunin, leading researcher of the Center for the Study of Central Bank Issues at the RANEPA, in his presentation titled 'The RF Central Bank's Policy and Monetary Sphere Stabilization in the Russian Federation' pointed out a number of factors that were significant in terms of shaping the RF Central Bank's monetary policy.

Thus, the conflict in Ukraine resulted in mutual sanctions imposed by Russia and several major developed countries, and so access on world capital markets was denied to Russian economic agents. In 2014, the Russian private sector's foreign debt shrank by more than $ 100bn, while the interest payments against foreign loans denominated in foreign currencies exceeded $ 50bn. The ruble's depreciation has sped up the inflation rate: the estimated foreign exchange pass-through effect in the RF varies between 10% and 20%.

The USD-to-ruble exchanged rate over the course of the year 2014 shrank by half; 20–30% of the foreign exchange pass-through effect could be observed in 2014, while 2015 this effect may become as high as 10 pp. As a result, the inflation rate in 2015 may amount to approximately 15%. Besides, the spending of the Reserve Fund and the National Welfare Fund, as well as recapitalization of banks will be the monetary factors conducive to a mounting inflation rate.

If a high inflation rate should persist over a long period of time, the inflation inertia effect will make it difficult to bring it down at a later stage. In order to achieve the goal of long-term macroeconomic stability, it will be necessary to stick to a moderate monetary policy aimed at playing down inflation.

Presentation materials >>>

The speakers at the plenary session also were: Board Member of the Yegor Gaidar Foundation Grigory Tomchin; Chairman of the Board of NDB Bank, Chairman of the Council of Not-for-profit Partnership 'Nizhny Novgorod Banking Association, Member of the Council of the Association of Regional Banks of Russia Alexander Sharonov.

In the framework of the Readings, the new Yegor Gaidar Auditorium was inaugurated at the Nizhny Novgorod Institute of Management.

At the evening plenary session, Director of the Gaidar Institute's Structural Research Center Mikhail Khromov in his presentation titled 'Important Issues Faced by the Russian Banking System' noted that one of the most acute macroeconomic problems involved in the banking sector's development was the debt burden shouldered by households.

In 2014, by way of debt repayment, Russia's population paid to banks a total of Rb 1.8 trillion in nominal terms as interest on consumer loans, which corresponds to an average yield of 17.3% per annum on banks' aggregate retail credit portfolio. At the same time, the amount of outstanding debt of banks' retail clients over the year increased by Rb 1.2 trillion (or 12.4%), when adjusted by the revaluation of retail loans denominated in foreign currencies. Thus, over that year, the developments in the lending market resulted in household losses amounting approximately to Rb 600bn. This is the equivalent of 1.7% of total household expenditures on goods and services in 2014.

This trend becomes even more pronounced if we look at the housing loans and other (consumer) loans separately from the bulk of all loans issued by banks. In 2014, housing loans remained the main driving force behind retail lending growth. The growth of debt against housing loans over that year amounted to Rb 0.8 trillion, or 30%, whereas the amount of debt against all the other types of (consumer) loans increased by only Rb 0.4 trillion, or only 6%. Simultaneously, the value of the housing lending portfolio in 2014, as demonstrated by the Gaidar Institute's estimations, was noticeably lower than that of the other types of loans: 12.4% vs. 19.3% per annum. The amount of interest paid against housing loans in 2014 was Rb 0.4 trillion vs. Rb 1.4 trillion of interest paid against other types of loans.

Thus, in the framework of consumer lending, in 2014 the amount of interest paid by households to banks was by Rb 1 trillion higher than the annual debt growth. This already corresponds to 3.0% of total household consumption expenditures. In other words, in 2014, the necessary debt servicing expenditures took up a noticeable share in the financial resources of households, which otherwise would have been spent on consumption. Thus, while in 2013 the amount of end-use consumption expenditures of households rose by 5.0% in real terms, in 2014 it gained only 1.9%.

In 2015, this trend will evidently become even stronger. January 2015 became a second month in a row when household debt against bank loans was in the decline. This means that the population continues to repay bank loans at a higher rate than to borrow anew, even if we disregard the amount of interest payments on loans. On the whole over that year, individual borrowers will have to pay to banks no less than Rb 2 trillion in interest. With due regard for the expected shrinkage of debt against bank loans to 10%, which corresponds to approximately Rb 1 trillion in 2015, the loss of disposable household resources due to the costs of bank loan servicing may become as high as 6–7% of the forecasted end-use consumption expenditures of households. This factor will also be responsible for declining effective demand, alongside the expected real disposable income shrinkage.

In his turn, the Gaidat Institute's researcher Yuri Kondrashin in his report titled 'Credit Institutions of the Volga Federal District (VFD): The Specific Features of Their Functioning and Prospects of development' presented the results of survey of heads of regional banks in the VFD.

The survey has revealed that regional banks are well aware of the advantages of state-owned banks in getting refinanced by the RF Central Bank: during the crisis period in 2009, it is in the state-owned banks that the RF Ministry of Finance was temporarily opening its accounts; unsecured loans were more readily issued to state-owned banks, and the bulk of subordinated loans were likewise issued to state-owned banks; in the summer of 2014, Sberbank and Vnesheconombank were allowed to borrow from the RF Central Bank using their mutual liabilities as loan guarantees.
Regional banks are expecting that the number of credit institutions will continue to decline. The most likely reason for this decline, according to the majority of respondents in each of the territorial units included in the survey, has been the tougher requirements introduced the regulator by way of ensuring the banking sector's 'rehabilitation'. Second and third among the reasons for shrinkage in the number of banks listed by the respondents were 'tougher competition' and lowering yield on bank operations'.

The respondents believe that, in order to boost the competitive capacity of regional banks, it will be necessary, first of all, to introduce certain measures with regard to state-owned banks so as 'to reduce the market share of big and state-owned banks'. It should be noted that the entities operating in the VFD expect this particular measure to be the least effective one. At the same time, another method of boosting regional banks' competitive capacity – a restricted market share of foreign banks – was supported only by representatives of the VFD.

Presentation materials >>>

The development issues faced by regional banks were discussed in the presentation delivered Deputy Chair of State and Municipal Finance of the RANEPA's Nizhny Novgorod Institute of Management Tatiana Novozhilova and Department Head of the Nizhny Novgorod Branch of Vozrozhdenie Bank Konstantin Yarkin Regional Banks: Their Present and Future. As noted in the presentation, 'the present' of Russian regional banks is shaped by absence of a legislatively consolidated status of a regional bank, their plummeting number, economizing at the expense of organizational structure, insufficient capitalization and reorganization; and their 'future' is bleak. In this connection, regional banks need support in the following areas: ranking of banks and different approached to dealing with them depending on their rank; government support of regional banks; targeted efforts aimed at creating optimal regional banking structures; support and promotion of enlargement of regional banks by way of their merger; legislative consolidation, control and support of new forms of credit institutions.

Presentation materials >>>