Zee Beam News

06-03-2005 Kommersant -
Sergey Ignatyev is counting on cheaper cucumbers
Predictions
At the International Banking Congress in St. Petersburg yesterday, Central Bank Chairman Sergey Ignatyev and his deputy, Andrey Kozlov, talked about urgent problems – inflation and the outlook for the financial system. Not only has the Central Bank failed to beat inflation, it appears that the banking system will be shaken again in the very near future, if not from Russia's accession to the WTO, then from a default caused by the population's inability to pay off consumer loans. At the start of the congress, Central Bank Chairman Sergey Ignatyev announced he was predicting "an abrupt slowdown of inflation in the very near future." But he was unable to sustain this optimistic note for long. According to Ignatyev, this year's high inflation rates are being caused by factors unconnected with monetary policy, and therefore the Central Bank is not responsible for them. His reasoning was curious: "Rates for housing and municipal services increased 27.7 percent, while consumer prices for meat rose 10 percent; and prices for fruit and vegetables rose faster than usual." Now, Ignatyev is counting on the harvest to lower inflation. Like the bureaucrats at the Ministry of Finance and the Ministry of Economic Development and Trade, the Central Bank chairman is hoping that inflation will retreat under the onslaught of cheap vegetables. Bankers commented cautiously on Ignatyev's announcement yesterday, trying at all costs to avoid the fruit and vegetable theme. However, some of them did not conceal their readiness to do anything for the Bank of Russia's sake and help it and the government fulfill the inflation plan. "We'll all go out into the fields and help with the harvest," the president of the International Bank of St. Petersburg, Sergey Bazhanov, told Kommersant. But the fact that the Russian financial authorities have nothing but the prospect of seasonal price reductions to offset price increases testifies to their helplessness. Meanwhile, the increase in noninterest budget expenses portends nothing but an acceleration of price increases. Ignatyev cited a series of encouraging figures. For example, "Monetary growth is continuing its downward trend. Whereas the M2 for 2004 grew 51 percent, in the last 12 months (May 1, 2004, to May 1, 2005), it grew only 32 percent. Other indicators that include foreign currency are also growing slowly." But the chief banker was forced to admit he had not been very successful in fighting inflation. According to the Central Bank's estimate, in the first four months of 2005, "the real effective ruble rate increased 6.7 percent, whereas strengthening of the ruble is not supposed to exceed 8 percent for all of 2005." Therefore, "it will be extremely difficult to reduce inflation to 8.5 percent and not allow a sharp strengthening of the ruble." "But I'm still not losing hope," Ignatyev continued, stressing that, in the long term outlook, monetary policy would actually be the governing factor influencing inflation rates, but that other factors would determine the short-term outlook. Ignatyev's next statement was evidently supposed to show the Central Bank's unlimited opportunities to control both the ruble rate and inflation. "The Central Bank could have compensated for the effect of nonmonetary factors, for example, by sharply curtailing the purchase of currency and by a steep revaluation of the ruble," he noted, but added that "this measure would have led to a reduction in economic growth and would have caused problems for a number of credit organizations." The Central Bank chairman had one more bit of good news for bankers in reserve. As Ignatyev noted, the Central Bank "is recording a reduction in abrupt inflows and outflows of short-term capital in connection with the decreasing attractiveness of speculative operations." This was achieved "through conversion to a bicurrency basket as an operational guideline for rate policy, which enables banks to maintain stable liquidity." That was the end of the Central Bank's optimism. First Deputy Central Bank Chairman Andrey Kozlov advised that, within five years, Russia could run up against the limits of the population's financial resources to pay for loans taken out because of rapid growth of both the consumer lending market and the risks. "Many countries have gone through this, and I would not like to see Russia get into the same situation," Kozlov noted. The expansion of consumer lending directly by commercial outlets without the involvement of banks worried Kozlov most of all. In his words, commercial outlets pay less attention to the borrower's financial stability than banks, which makes for riskier loans. In order to avoid repeating the experience of many countries, Kozlov suggested that both politicians and academics evaluate the situation so that there would be time to take measures and that all market participants would feel comfortable. Later on, it was learned that the banking sector would be reeling without consumer loans too, as soon as Russia joined the WTO. Kozlov said that competition from Western financial institutions was not the only threat to Russian banks. He suggested that "if some economic sector is too open, it can become degraded or even disappear completely, which would result in decreased demand for banking services."