Russia Forum Buzz: The CNBC Summit: Banking on an Unconventional Future

April 23, 2013


Geoff Cutmore introduced the debate looking at the unexpected consequences of QE and the new direction for central banking. Questions were asked to the participants – Leszek Balcerowicz, Gazi Ercel and Elvira Nabiullina.

Has the policy of QE succeeded in stimulating growth? Balcerowicz – growth has not been as strong as expected. The positive consequences are short-term, but the negative consequences take time to show. Meanwhile, QE is stimulating inflationary pressures, and bubbles in emerging markets. QE is a great experiment without empirical analysis to justify it. The policy of QE has enabled politicians to avoid fiscal and structural reform.

The credit mechanism in the Western world is broken – what can be done? Nabiullina – countries not at the heart of the crisis were able to cut rates, but those at the heart of the crisis had to use QE for additional stimulus. It is hard to see if this has been effective. So far, inflation has not materialized, but equally the policies have not stimulated much growth. They have driven negative consequences such as bubbles from speculative capital flows. That said, many countries are in real difficulty and need to engage in QE in order to get through a difficult time.

Has global QE driven inflation in Russia? Nabiullina – the reason for higher Russian inflation is mainly domestic and structural, not external.

What are the negative consequences of QE? Balcerowicz – negative consequences include preserving zombie banks and companies; reducing confidence, as it is hard to know when this period of uncertainty ends; reducing the pressure on governments to reform; and pension funds have suffered, reducing the ability of corporates to spend on capex. Moreover, the wealth effect is only transitory. The people pushing QE have not thought of the negative effects of their policies.

What else should central banks be doing if not QE? Nabiullina – for Russia, it is key to drive down inflation, continue with a flexible currency, create financial stability and reduce financial systemic risks – for example, with the creation of the mega-regulator.

What are the lessons from Poland for Russian growth today? Balcerowicz – capacity utilization increases and raw material price increases have been the key drivers of Russian growth in the past, but are no longer present. Moreover, the population is aging. Without reform, Russia will thus slow. It is import to reduce political interference in the economy and introduce privatization; the pension age can be raised, as happened in Poland.

What can be done to encourage growth in Russia? Nabiullina – the main issue of government focus is the investment climate and the structure of the economy. To reduce the dependency on oil is key. The Central Bank will aim to help the development of the financial market, which is underdeveloped – the capitalization of the equity market is only 40% of Russian GDP and local equity investment funds are only 1% of GDP.

What steps could be taken to attract foreign investors into Russia? Nabiullina – legal changes are needed so that it is easier for investors to operate in Russia, and the financial infrastructure needs to be improved.

What can we learn from Turkey? Ercel – macroeconomic stability is the first requirement, hence low inflation and a small fiscal deficit. A lot of young Turks are educated abroad, which makes it easier for them to bring back investment and expertise. It is a good idea to reduce the dependency on oil.

What are the risks and benefits of privatization? Balcerowicz – the risk lies in holding back privatization, which encourages politicization. The worse risk is in politicized banks, which often end up with the largest amounts of debt issues – for example, in Spain (the cajas), the US (Fannie Mae) and Germany (the Landesbanken). Nabiullina – privatization must be done correctly. It must not just substitute government monopoly with private monopoly, but create a competitive market. And it must be done so as not to sell state assets unfairly or too cheaply. Ercel – privatization is good to stimulate greater growth and more dynamism.

Will Russian money come back to Russia after Cyprus? Nabiullina – Russian investors have now realized that having their money abroad is indeed risky. Cyprus is a very dangerous precedent, as it attacks the basis of trust on which banking is founded. Citizens should not have to pay for the errors of the regulator. Russian investors with funds abroad should bring them back to Russia, where the system is stable and well regulated, and deposits have a state guarantee.

Is the banking system in Russia stable? Nabiullina – the shift to Basel 2 is part of the move to reduce systemic risk in Russia. The mega-regulator also helps the government understand and manage the risk of the financial sector.