Elvira Nabiullina’s speech at State Duma’s plenary session on Bank of Russia’s 2023 Annual Report
Good afternoon, dear deputies. Good afternoon, Mr Volodin.
Today, as required by the federal law on the Central Bank, I am presenting our Annual Report for the previous year. But before moving on to the report, I would like to thank all the parliamentary factions and dedicated committees for the work you’ve done to review our report. We had an open and unbiased dialogue. In addition to the meetings, we also received over 100 written questions from deputies and did our best to give comprehensive, substantive answers.
The main questions we were discussing when reviewing the report were related to monetary policy and the development of the financial sector and payment infrastructure. We also received many questions about financial fraud.
Fist of all, I would like to explain why our monetary policy remains tight and how this is influencing the economy.
I would like to remind you that we had been keeping the key rate at 7.5% per annum from September 2022 for 10 months, and combined with the Government’s measures, this helped the economy recover. When the recovery completed and inflation started to soar, we raised the key rate by 8.5 percentage points.
As we discussed, there had been a lot of concerns in autumn that the key rate increase would stop the development of the domestic economy. However, we can see that this is not so.
In 2023 Q4, economic growth slowed down slightly but remained significant. As of the end of the year, GDP increased by 3.6%. At the moment, all high-frequency indicators show that the economy continued to grow quickly in 2024 Q1.
Our monitoring of businesses, that covers approximately
Tight monetary policy is aimed exactly at preventing excessive pressure of demand on the economy so that rising demand will not become detrimental to growth.
Figuratively, this might be compared with long-distance running when it is crucial to pace oneself. Soaring demand forces the economy to grow increasingly faster and it might really be able to go hard for a certain period. However, the pulse frequency would be too high. In other words, inflation would speed up, which would quite likely decelerate or even stop the growth of the economy later on because it will run out of steam.
Indeed, companies made significant investments in the expansion and automation of their production and continue to invest funds, including to address such issues as staff shortages and record high utilisation rates of production facilities. Yet, it takes time for investments to transform into the supply of goods and services and the removal of transport infrastructure bottlenecks.
If output lags behind surging demand, this will be pushing prices higher, while investment and consumer demand will be increasingly shifting to imports. To purchase imports, we need foreign currency. In the conditions where exports are not expanding, as we are now observing, elevated demand will inevitably entail weakening of the ruble.
We could see such a situation last summer when excess demand was provoking price increases and depreciation of the ruble. In response, we decided to raise the key rate.
Today, we can already see the first results of our policy — the peak of inflation has been passed. The analysis of current price growth, that is, month-on-month price dynamics, shows that, from July through November, prices were rising at a double-digit pace in annualised terms, and inflationary pressure was very strong. It notably weakened in December—January and is now about 6%.
If we had not raised the key rate, inflation would have been much higher than the 7.4% recorded at the end of the previous year. Moreover, it would have continued to accelerate further. I would like to emphasise that a high key rate protects people’s real incomes and monetary policy is thus directly contributing to the fight against poverty. Inflation affects low-income people most seriously, including because these are basic goods that become more expensive in the first place. There were plenty of such examples last year.
High inflation impacts manufacturing as strongly as low-income households. Most companies already feel that the rise in costs, which is inevitable amid high inflation, is hurting them even more than a temporary increase in interest expenses. This is evident from both comments given by business executives — and we carry out a lot of meetings with them — and our analysis of costs in manufacturing. In the current conditions, there is no contradiction between tight monetary policy and economic development or the real sector’s interests, as is sometimes stated.
In addition to the deceleration of inflation, the key rate increase helped achieve another important result — in August, the inflow of funds into deposits started to grow actively. Over the five months until the end of the year, household deposits increased by ₽5.3 trillion, which is a record high growth rate. Owing to high interest rates, in 2023 H2, people earned nearly ₽1 trillion as interest on their deposits.
The inflow of funds into deposits continued: over 2024 Q1, it amounted to almost ₽2 trillion.
Moreover, a higher key rate helps stabilise the ruble.
The exchange rate certainly depends on trade flows in the first place. Last year, exports contracted, whereas imports increased. The ruble was expectedly depreciating. In summer, the weakening of the exchange rate sped up because the demand for imports was growing.
You can see a cut-off line in the diagram — this is the key rate increase on 15 August by 3.5 percentage points at once to 12% per annum. This stopped the weakening of the ruble, although we needed to raise the key rate further to completely terminate the rise in inflation and depreciation expectations. There were also other important factors, in particular higher oil prices. Nevertheless, according to our estimates, monetary policy produced the main effect, including because it made the ruble more attractive as a store of value.
Another major effect is that the expansion of lending returned to a more balanced pace compared with last year’s record highs.
Over the year, the corporate loan portfolio increased by 20%, or more than ₽12 trillion. The amount of corporate bonds was up by ₽4.6 trillion. These funds were an important contributor to the development of the economy as they were used to purchase equipment, replace external debts, acquire businesses from foreign companies exiting the Russian market, and develop import substitution, among other things.
Thus, with these statistics, it is hardly possible to say that loans are unaffordable for businesses. Interest rates went up, and at the beginning of 2024, the expansion of corporate lending began to slow down. Nonetheless, this is not about termination of lending or economic growth as a consequence. Indeed, the growth in lending will be more moderate this year, but this is only as compared with the record highs of 2023.
Furthermore, credit is an additional leverage, while the main source of investment is companies’ equity.
Last year, the real sector demonstrated high financial performance: companies’ overall profit increased by 35% to exceed ₽33 trillion, which is also a record high. As compared with the year 2019 preceding all the challenges of the recent years, profit doubled and, adjusted for accumulated inflation, surged more than 1.5 times. This means that companies feel more confident as high profit reduces the need for borrowings and, even if they are needed, companies are able to raise and service loans despite high interest rates.
Actually, this is the reference point for assessing the banking system’s profit — its amount over the previous year in general was comparable with the corporate sector’s monthly profit.
Banks lend to the economy thus contributing to its development, while profit enables them to expand credit which is the main source of their capital.
Another factor supporting credit activity is the share of corporate loans at floating rates which notably increased over the past two years. In February, such loans accounted for as much as 54%. By the way, this means that businesses remain confident that we will be able to bring inflation back to the target and shift to a reduction in the key rate.
Why are we still keeping the key rate at 16% per annum although inflation is now almost two times lower than its peaks? Deputies were asking this question during the discussion of the report.
The structural transformation of the economy is accompanied by a rise in expenditures, while the contribution of fiscal policy has increased — it is influencing the economic development through government orders, government investment, higher wages, subsidised lending, and direct subsidies. So as to avoid a situation when all this will be constantly pushing up prices, room for private credit is being reduced. This means that monetary policy should be tighter.
We will begin cutting the key rate when we make sure that inflation is decelerating sufficiently fast and inflation expectations are returning to normal.
The extensive subsidised lending programme has become an example of what could happen when cheap loans are fuelling demand, whereas supply is still lagging behind even despite its expansion. When the mortgage portfolio surges by 35% a year, this inevitably pushes prices higher and increases households’ debt burden.
As we can see, the proportion of mortgage lending to people with high debt service-to-income ratios has risen 1.5 times over the past two years. In 2023 Q4, nearly a half of borrowers (45%) raising loans faced the prospect that they would spend over 80% of their incomes on debt repayments.
The gap between new and existing housing prices continued to expand, reaching 44% as of the end of last year, compared to the historical norm of about 10%.
Because of soaring housing prices in recent years, the maximum insurance compensation on an escrow account frequently cannot cover the price of an apartment. Therefore, we suggest discussing, together with you, its twofold increase from the current ₽10 million according to law to ₽20 million.
In our opinion, the example of mortgage lending is illustrative and insightful. The last thing we would want to see is the start of similar processes in other economic segments as well.
When inflation is low, loans will become more affordable again. In 2017, we already decreased the inflation rate to 4%. As you remember, this was when, even without any large-scale subsidised programmes, mortgage lending began to surge, while market-based mortgage rates were declining. People could raise mortgages at
Our objective is to ensure that loans again become equally affordable for everyone, with inflation staying at a low level and market interest rates being moderate.
Last year, we launched incentive-based banking regulation for those projects that the Government classified as top-priority ones for import substitution and technological advancement. These incentives made it possible to finance projects that are vital for the economy in the amount of approximately ₽300 billion. Nevertheless, as you rightly noted in your questions, the potential that we could foresee is much more significant. What do we need to ensure that our incentives are utilised in full? We believe it essential that they are more closely combined with government support measures, as was initially designed. In other words, a project that conforms to the Government’s eligibility criteria should receive subsidies, tax privileges and government guarantees on a priority basis. We will be discussing this issue with the Government.
To finance investment, financial institutions need long-term money. These are irrevocable certificates for banks, the long-term savings programme for non-governmental pension funds, investment accounts of the new, third type for investment funds, and unit-linked life insurance for insurers, that is, every sector of the financial market needs longer-term funds, and the measures for this have been provided for.
We suggest you discussing additional incentives as well. In particular, we propose reducing banks’ contributions to the deposit insurance system for ruble deposits with maturities of more than three years, that is, for long-term deposits, as well as for irrevocable savings certificates so that banks could offer more advantageous terms on such products. With regard to depositors’ long-term funds, we suggest raising the insurance compensation limit from today’s ₽1.4 million to ₽2 million and, where funds are deposited based on a long-term irrevocable certificate, to ₽2.8 million, as the President proposed in his Address to the Federal Assembly.
We can see that the capital market is again becoming an important source of funding for the real sector. Companies have resumed initial public offerings. Moreover, the year 2023 was the most successful one in terms of the amounts of offerings in the domestic market over the past 12 years. Specifically, the number of active investors surged 1.5 times, and the inflow of new money into the securities market exceeded ₽1.3 trillion.
Implementing various measures, we have begun to address the problem of Russian investors’ assets that were frozen in foreign infrastructures. As of the end of last year, investors regained access to their assets worth over ₽3 trillion. These measures have covered at least 2.5 million Russian investors. We continue this work jointly with the Government.
I would now speak on settlements and payments. The share of non-cash payments in retail turnover exceeded 83% as of the end of 2023, compared to as little as 25% in 2014. Such a significant increase is evidence of people’s confidence in non-cash payments, their convenience and popularity.
Importantly, despite the toughest sanctions, people had no difficulties making payments inside the country. The entire range of payment instruments is being developed further. These are Mir cards, the Faster Payments System (SBP), and banks’ in-house payment systems.
Transactions via the SBP increased several times again. Noteworthy, one in two Russian residents make money transfers and one in three pay for purchases through the SBP. This system did not exist just a short while ago.
From early April, banks are obliged to provide the service of business-to-business payments via the SBP. As we can see, it is critical for businesses that the funds are available to the payee instantaneously on a 24/7 basis.
This year, we will expand the range of possible payments to the budget system. In particular, people will be able to pay for kindergartens and theatre tickets through the SBP. Individuals will thus save on fees since all payments via the SBP are fee-free for people. We are also planning to introduce a universal QR code that will enable people to choose the bank through which they prefer to pay.
The exchange of financial information inside the country is now made primarily through the Bank of Russia’s Financial Messaging System (SPFS). The exchange inside Russia through SWIFT has almost terminated.
Furthermore, the SPFS is now used much more actively for external settlements as well. Overall, more than 160 foreign participants from 20 countries have connected to our system.
In addition, we have been expanding the network of correspondent relationships with banks from friendly countries, continuing to create the conditions for settlements in national currencies. Today, they account for two-thirds of all settlements for exports and imports. The US dollar and the euro are no longer the main currencies in Russia’s foreign trade.
These are the elements of the new infrastructure of cross-border settlements that is resilient to the sanctions. Nevertheless, there is still a lot to be done jointly with our key partners. We will be discussing these issues within Russia’s chairmanship of BRICS this year.
Last August, after the required laws had been adopted, we launched the pilot testing of the digital ruble on real transactions. We are testing the basic transactions, including opening of digital wallets and money transfers to them, person-to-person transfers, payments for goods and services, and simple smart contracts. We are planning to gradually expand the range of participants in the pilot testing and the functions of the digital ruble platform. Based on the results of the pilot testing, we will make a decision on when to start scaling up the digital ruble project, but this will be no earlier than in 2025, according to our estimates.
Some countries are also creating similar projects, and we are already discussing with them the option of cross-border transactions in central bank digital currencies. However, it is essential that they are ready for this not only in terms of technology, but also politically.
The advancement in financial technologies is as fast as in payments.
We can see that the Digital Profile is becoming increasingly popular among people. Over the past year, individuals were using this system two times more frequently: they received over 30 million loans, insurance policies and other services without any additional certificates and complicated questionnaires.
We have started discussing approaches to regulating the use of artificial intelligence. This technology has been rapidly penetrating all areas of people’s life and we want financial institutions to apply it openly, safely and responsibly, to the benefit of their clients.
Esteemed deputies, I am grateful to you for your close attention to the topic of protection of financial consumers’ rights and interests and the fight against fraud. Last year, the State Duma adopted over ten laws in this area.
Today, people in the Orenburg Region are suffering a calamity, and we expect that the law on loan repayment holidays you approved last year will help households. Hundreds of those affected by the flood have already filed applications. By the moment, banks have already granted repayment holidays to 200 borrowers. We recommended that banks should apply a simplified procedure when considering these applications as people are unable to collect various certificates at the moment. We will be closely monitoring and controlling this situation.
The law on the effective interest rate (EIR), which is very important, was brought into force already. The EIR is a critical indicator for people and it now takes into account all extra services and payments that were previously behind the scene because they were called voluntary.
We extended the cooling-off period when people can get a refund for any extra services that were bundled. There are now no ads offering loans at close-to-zero, actually incredible interest rates that in reality involve such conditions that the EIR goes into high double digits.
Another law will come into force very soon — from May, people will be able to make fee-free money transfers between their accounts with various banks. This is actually a landmark change. The law eliminates the artificial barriers that prevented people from freely using their savings and completely solves the problem of ‘payroll slavery’.
The new law on countering cyber fraud will become effective a little later, in July. This law will introduce a two-day cooling-off period for money transfers to suspicious accounts. Individuals will thus have time to think better, comprehend when they are dealing with fraudsters, and cancel such money transfers.
This year, the State Duma adopted the long-awaited law on the self-ban on loans that enables people to secure themselves against a situation when fraudsters take out a loan on their behalf.
I would like to note that we were discussing fraud issues at all our meetings on the Annual Report. We have not yet made any fundamental progress in combating fraudsters, and we are actually acting ex post. We were discussing this problem with both dedicated committees and factions. The two new laws that I’ve mentioned will certainly have an effect, but we need to also search for other solutions together. We have agreed to discuss additional measures with deputies in greater detail.
Several draft laws on financial issues that are important to individuals will soon be developed. I would speak on those that we consider the most critical ones.
The first one should establish a limit on floating interest rates in lending. As I’ve said, increasingly more companies are raising loans at floating rates, but, in contrast to large companies, it is much more difficult for individuals and micro businesses to assess all inherent risks. Initially, an interest rate may seem to be attractive, but it might then surge, seriously increasing borrowers’ debt burden. We want to prevent such a situation.
Speaking of financial pyramids, unfortunately, fraudsters are often profiteering from people’s interest in investment. Besides, they are continuously inventing new schemes. Moreover, they do not need a lot of money to launch another financial pyramid in the internet. Therefore, we believe it crucial to adopt the law prohibiting entities not supervised by the Bank of Russia from raising individuals’ investments.
These draft laws are being prepared for the second reading. Furthermore, we are discussing new initiatives protecting consumers.
You frequently draw our attention to various unfair schemes used to sell financial products. We are combating them and can see certain results, including a reduction in the number of complaints. The number of complaints about misselling and unfair sales halved last year. However, our experience of recent years proves that we still need to raise fines for violations of financial consumers’ rights. Such breaches should entail financial losses. Today, this is not so in many cases, especially when a large bank is involved, for instance. A million of rubles as a fine is just a minuscule amount for such a bank. Breaches might total many millions, and we did detect such cases, but banks were only to pay a fine of one million.
We believe that the fine for deceiving consumers, for unfair profit-making should be raised several times, up to 1% of capital, if the bank does not rectify the violation. Such fines are charged within the framework of the anti-money laundering laws. In our opinion, they have given good results — banks count the money very well.
Furthermore, we were discussing the regulation of instalment payments with you. People are actively using this option, and the instalment market has been developing very quickly. Over the past year, it expanded nearly twofold. We are totally aware of the convenience of instalment payments. However, this service lacks transparency. We need to find the right balance in this area.
We believe that all instalments for a fee when a person pays for this option should be in the form of a loan or a microloan as, in reality, this is exactly what a loan is. Accordingly, consumers should be protected as efficiently as borrowers raising bank loans. Nevertheless, it is certainly reasonable to leave room for non-bank providers of fee-free instalments, but to regulate their operations in such a way that consumers could comprehend and adequately assess all critical conditions of instalments and avoid over-indebtedness.
I would like to note that, when discussing this report, we received fewer questions about the affordability of compulsory motor third party liability insurance (CMTPLI), but this topic is still in the focus of attention. The situation improved last year. In contrast to 2022 when policies became more expensive, although not as significantly as spare parts, in 2023, there was no rise in prices in the most demanded category. The average price of insurance policies for private cars remained at the level of ₽7,400, that is, considering inflation, the real price even declined. Simultaneously, the number of complaints about refusals to sign CMTPLI contracts decreased four times. As you remember, that was a huge problem.
This is the result of both our supervisory measures and the effect of the reinsurance pool where insurers transfer potentially loss-making policies.
Measures counteracting fraud in CMTPLI that are now being implemented by regional working groups are extremely important. I would like to emphasise this as representatives of Russian regions are also participating in this session online. Nevertheless, the number of regions being in a high-risk zone in terms of fraud in CMTPLI decreased more than two times, namely from 12 to five.
Before winding up, I would like to speak about the question that was raised in the course of meetings with the factions, specifically about how the Central Bank’s policy might influence the fight against poverty and help reduce inequality. In addition to what is being discussed with the Government regarding taxes and fiscal policy, the first aspect — I am returning to what I’ve started with — is lower inflation. Inflation is a tax on poor people who are most affected by price growth as it is corroding their low incomes.
Secondly, our policy helps enhance people’s protection against over-indebtedness. I’ve already been speaking about this. We are taking all necessary measures in this regard.
Thirdly, our policy is combating fraud in the financial market because low-income individuals are the most vulnerable group.
Fourthly, we are implementing measures to support people facing hardships. They include loan repayment holidays: we are going to address the issue of comprehensive settlement of the bank debt of a borrower who has loans with several banks but cannot agree on loan restructuring with them.
Fifthly, we need to develop financial products intended specifically for low-income people, such as a social account and a social deposit. As you remember, the relevant draft law was developed in compliance with the State Duma’s recommendations following our report for 2021 when interest rates were low. This initiative guarantees that low-income individuals will receive sufficiently high interest on both the card balance and a deposit of up to ₽50,000, as well as will be able to make fee-free payments in the amount of up to ₽20,000 per month. According to preliminary estimates, over eight million people might take advantage of this additional support measure.
Finally, special financial literacy programmes reducing people’s risks help them better navigate the complex financial market and more efficiently use its opportunities to save and multiply their incomes.
Winding up, I would like to thank the State Duma since a lot of what I’ve been talking about is the result of our joint efforts. Only when combined, a well-balanced macroeconomic policy, a sound and stable financial system and the laws encouraging innovations and protecting consumers can produce good results.
Last year, the State Duma adopted 57 important laws. In this regard, we are working in cooperation with the Government so as to ensure that our measures promote the conditions for steady growth and economic development and increase people’s well-being.
It would be impossible to assess the previous year separately from the year 2022. Over these two years, the economy managed to weather the crisis and gained a strong momentum. We will continue our joint work to ensure that the financial market supports further economic growth and provides necessary resources for economic development.
I am grateful to you for our joint work. The Bank of Russia greatly appreciates our cooperation and is always ready for an open dialogue. Thank you for your ideas and suggestions, and for the questions you raise and make us address.
Thank you for attention.