UPDATE: Cbank: Extra spending on May decree may overheat Russian economy

(Adds details in paragraphs 10, last two paragraphs)

ST. PETERSBURG, May 24 (PRIME) -- Additional budget spending of 8 trillion rubles on fulfillment of the Russian president’s May decree over the next six years without structural reforms may lead to overheating of the economy, the central bank’s Chairwoman Elvira Nabiullina said Thursday at the St. Petersburg International Economic Forum.

President Vladimir Putin earlier signed a decree on Russia’s national goals and strategic development tasks till 2024 in which he ordered the government to ensure the country’s entry into the top five of global economies, a higher than global rise of the national economy, and inflation not exceeding 4%.

“We are mainly discussing 8 trillion rubles, what are the sources of these 8 trillion rubles. They can in fact be various. But the key question in my opinion is whether these additional expenditures can increase potential pace of economic growth. Because we are already now growing at the potential level,” Nabiullina said.

“This is the estimate of the central bank: 1.5–2% - this is the potential growth pace, and any fiscal stimulus without sufficient structural reforms, if we shift these potential growth rates, can lead to elements of economic overheating, inflation growth, short-term splash of growth and then fall,” she said.

Investments, but not debt capital should be the main source of financing economic growth, Nabiullina said.

“We have a problem of deficit of investments… We need a capital, we need sources of capital,” she said.

“And the main goal is now to work so that precisely capital and direct investments should be the main source of financing.”

The banking system is ready to finance the Russian economy in terms of liquidity and capital adequacy, Nabiullina also said.

“In terms of capital and liquidity the banking system is ready to finance the economy. The capital is sufficient, and in the process of the banking system recovery it has become more realistic,” she said.

The government’s choice of sources for financing of state programs will have an impact on the central bank’s monetary policy. “We are also waiting for details on these issues, as it would have an impact on the monetary policy,” Nabiullina said.

The recovery of the banking system has not been completed yet, and the central bank plans to finish it, she added.

“Work (on the banking system recovery) is not over yet, although we made a big part of it, but we intend to complete it and enhance banking oversight,” she said.

The regulator has no plans to use special instruments to stimulate the Russian economy’s growth, it will develop market mechanisms to support the economy, she said.

Nabiullina also said that the central bank sees no critical risks of foreigners leaving the market of Russia’s OFZ government bonds, as it would raise the yield on securities only by 40–50 basis points. “There may be an increased volatility, but the equilibrium point will remain close to that. I don’t think there will be any serious consequences, as our state debt market is not big, and the amount of OFZ bonds is not big as compared to our economy,” she said.

(61.5945 rubles – U.S. $1)

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