Elvira Nabiullina’s speech at State Duma’s plenary session on Bank of Russia’s 2024 Annual Report
Thank you very much, Mr Speaker, for your kind words. Good afternoon, esteemed deputies.
Today, as required by the Law on the Central Bank, I present our Annual Report for the past year.
First of all, let me thank the relevant committees and all the factions for their time spent preparing this report for consideration. We have done a really big job, having begun several weeks ahead of today’s meeting.
We made preparations to ensure we can answer your questions. We had more than 110 questions in writing. In parallel, we worked with the committees reviewing the report with the participation of government representatives. I welcome the fact that my colleagues are participating in this meeting: the Minister of Finance, the Minister of Economic Development and the Deputy Minister of the Ministry of Digital Development. We work in unison to deliver a shared result.
Right before this meeting, my deputies and I held meetings with the factions. They were all marked by very substantive dialogue and discussion. Certainly, the agenda was understandably dominated by inflation and the key rate.
However, you raised many other issues that are of concern to our people, including fraud, microfinance companies and debt. In my presentation today, I will continually be returning to your questions. First, I would like to present a brief overall description of the last year and comment on current data.
We had a twofold task: to prevent spiralling inflation while ensuring we do no harm to the economy’s capability of developing and working for our people.
And I would like to remind you of something bad that did not materialise. After all, many tasks of a central bank are about protecting the economy and the financial system against real threats. When the central bank succeeds, it is taken for granted. But, believe me, behind this success are actions and careful preparations.
When the exchange infrastructure was hit with blocking sanctions last year, we braced for serious disruption to our financial system. But that did not come to pass. There was just a change in the format of trading, but the calculation of official exchange rates was not interrupted for even a single day. Clearly, such a relatively painless transition could not have happened all by itself. That was the result of work over the two preceding years. At the end of the year, sanctions were imposed on fifty of our banks with foreign trade operations. Indeed, we had to deal with the difficulties, but they did not suspend cross-border payments.
This would have been impossible without a sound financial system and flexible regulation. Banks’ lending was active, and our policies were intended to ensure that banks can restore their capital and liquidity cushions should new shocks emerge. Recent history shows that it is extremely important to have a safety margin.
The contribution of a sustainable financial system to economic growth is hard to overestimate. However, it is wrong to leave aside monetary policy or attribute negative effects to it. This is the range of subjects we discussed with you.
In the slides, you can see indicators for the most important industries. Except for mining operations, which are strongly affected by sanctions, growth is solid across the board, and most notably in mechanical engineering.
All the concerns that have been voiced since 2023 about increased key rate risks undermining growth and causing a recession, stagflation and mass bankruptcies – the list goes on – have not matched reality. The key rate performs the task assigned to the Bank of Russia by law: it protects the resistance of the ruble by maintaining price stability, and it supports households’ real incomes, enabling balanced economic growth.
Our forecasts and the Government’s assume that growth continues into this year, although at a more moderate pace.
Rapidly growing prices are the main threat to households’ real incomes and economic development alike. Therefore, we had to raise the key rate to 21% to shift the focus of efforts from containing to reducing inflation.
Let us look at monthly inflation movements. It was close to 14% in November and December. That is, had it continued to grow at the year-end pace, its full-year reading would have been 14%. In January, inflation was below 11% and declined to under 8% in February. The data for March are due this week.
Certainly, we had questions from deputies about when we can switch to rate reduction. I can say that we will approach this matter carefully and cautiously. We remember that last year, inflation accelerated again after slowing early in the year. We need to make sure that the current slowdown in price growth is sustainable. Tectonic changes in global trade are another factor to consider. They are unfolding before our eyes, and we have yet to understand where they will lead the global economy and how they will affect Russia. This is a significant new risk to factor in.
Another effect of the higher key rate is protection of the ruble against self-accelerating devaluation. Unfortunately, the sanctions are causing very significant exchange rate fluctuations. However, thanks to monetary policy, most of them are short-lived. The past three years have seen a sizeable drop in exports (14%, due to external restrictions), while imports have remained at about the same level. What does this mean? While foreign currency earnings are shrinking, the amount of foreign currency to pay for imports remains unchanged. But for the key rate, this would have weakened the ruble more than its current rate of exchange shows.
Slower inflation is based on more moderate growth in lending, but I would like to emphasise that this is still growth. Here it is important to understand what to you are compare it to, as it was at an all-time high in 2023. The rise in mortgage lending continued throughout the first half of last year until the scope of subsidised lending was reduced. Given this expansion, the rapid rise in new housing prices would have persisted.
For most of the past year, prices for housing under construction rose at close to 10% in annualised terms. In the fourth quarter, after the effects of universal subsidised mortgages had almost gone, the price growth declined by a third.
Moderate price growth alongside an outrunning increase in household incomes is the first condition for affordable housing. The second condition is a reduction in market-based mortgage rates. They are very high, but they are set to decline as inflation and the key rate go down.
Our estimates show that house sales remain at an appropriate level, allowing developers to complete earlier projects and start new construction, although there are indeed fewer launches. This drop is only natural after several years of soaring demand and rising prices on the back of universally available subsidised mortgages.
Now on to corporate lending. More than half of the increase in lending occurred on the back of investment projects and housing construction. The slowdown did not emerge until November; in annual terms, corporate lending was up 18%. Even adjusted for inflation, this is twice as high as GDP growth.
This year, lending will continue to support economic development.
We expect investment activity to remain high and close to last year’s readings. Investments peaked at the beginning of last year to a full-year total of ₽39.5 trillion or almost 20% of GDP. Almost a fifth of GDP is no small figure, and a record high we have not seen since the mid-2000s. In the slide, the sum for the last three years shows that investment is up by a quarter, while in the previous three years it added a mere 11%.
Investment is expected to remain high as long as corporate profits remain high. Remember that it is corporate profits, or rather ‘equity’, instead of credit, that is the main source of investment worldwide.
Profits have been above ₽30 trillion for the second year in a row. They declined last year, with the main drag on profits being gas production and several other industries, which are being hit by export restrictions and lower global prices. In manufacturing, profits were up slightly to ₽9.7 trillion; in a number of sectors, their growth was quite notable. Producers of investment goods can boast a 40% rise in profits to a total of ₽2.2 trillion; profits in construction and real estate added 23% to total ₽1.5 trillion. Even in agriculture, despite poor harvests in some regions, profits increased 7% to ₽670 billion. I have talked about this for so long and I use the numbers to counter the view that that all profits are in the oil and gas sector. This view is not correct. Our economy has changed.
Average monthly profits in the real sector hold at a level of almost ₽3 trillion. This is a response to the frequent questions about how business can survive through the high rate.
Certainly, there are loss-making and highly indebted companies. They find it much more difficult than companies that develop their business on the back of profits and equity. However, the vast majority of companies we monitor are financially sound and have resources for development.
When credit growth slows (I would like to emphasise once again that lending is not shrinking, but just growing at a slower pace), it is imperative to ensure that resources are primarily allocated to priority projects. To this end, the Bank of Russia, jointly with the Government, is advancing a programme of incentive-based banking regulation based on so-called taxonomy. Under this programme, more than ₽0.5 trillion worth of loans have been disbursed, and banks have approved ₽1.5 trillion worth of credit lines for taxonomy projects, while the budget for approved projects is about ₽3 trillion. We can see that this facility is delivering.
The second area of our cooperation with the Government is the securities market. It should play a more prominent role in investment financing. I can feel full support from deputies in this matter.
Last year, we successfully started a long-term savings programme and the individual investment account (type 3) programme. We are also launching unit-linked life insurance. These are all long-term instruments. They enable citizens to solve their needs in life, and at the same time, provide the economy with long-term resources for development.
Concurrently, jointly with the Ministry of Finance and the Government, we are working to unblock the foreign assets of Russian investors. Taking into account all the measures in place, by early this year, we have managed to unblock about half of the assets of Russian citizens and companies that were blocked in 2022.
Now to the other side of capital market development – new public offerings. Their amounts are still incomparable with the growth of corporate loan portfolios – let us compare ₽100 billion and ₽13 trillion. Many large companies complain about expensive loans, but sometimes they do not even think about alternative options. We believe that this has to change, and business support programmes should be changed; we submitted the relevant proposals to the Government last year and we are discussing them. Speaking of small and medium-sized companies and small technology companies, we have agreed with the Government that starting this year, the costs of going public will be subsidised as part of a national project. We hope that this case will be extended to other companies.
I will now move on to consumer protection. This is an area where the State Duma has played an especially prominent role in recent years. We have always asked for your support.
The transparent total cost of credit, efficient measures against tied selling of paid services and advertisement of non-existent low interest rates, and the permanent mechanism of loan repayment holidays for individuals were all only possible thanks to legislative changes.
A new popular option is free transfer of large amounts across accounts in different banks. The day this arrangement was put into operation, the amount of transfers jumped 1.5 times, showing the high demand for the service.
Doubtless, there are still problems to address. In mortgage lending, there are more schemes offering low interest rates that seem attractive, but ultimately result in overpriced flats. This is why we intend to counter such schemes. The mortgage standard has come into effect. We will closely monitor compliance. Should banks fail to meet the standard, we will seek your support so we can take tough legislative action.
Also, at all the meetings with deputies, I mentioned the need to increase fines for consumer protection violations. This is really important. Major banks will be liable for a maximum fine of ₽1 million. Clearly, their profits are more than that if they are involved in unfair practices. This is the area where fines should be increased.
We need to begin regulation of instalment plans now, so we do not deal with a host of problems later. We can see that the market for instalment plans is rapidly expanding, but consumer rights are unprotected. I thank you for approval of this draft law in first reading.
As regards debt overburden management, we seek to be proactive in all aspects. Last year, measures were introduced or strengthened to counter excessive debt in unsecured loans, car loans and mortgages.
Microfinance loans are special, which many deputies noted.
We have consistently lowered the maximum interest rate and maximum overpayment on microfinance loans. As a reminder, the initial ceiling was 400%.Now the overpayment ceiling is down to 130%. That is, for a loan of ₽10,000, even including extra charges and fines, the amount cannot exceed ₽23,000.
The next step is due and we have discussed this with you: reducing the overpayment to 100%. But there is more to be done. We must break the chains of microloans where a borrower only takes on a new loan to repay the outstanding microfinance loan. This is a straight road to a debt spiral.
We propose three interrelated changes: the principle of one major loan per borrower, a three-day cooling-off period between loans and a reduced ceiling of overpayment of 100%. We count on your support.
Certainly, it is necessary to pull the plug on shadow creditors whose services may become more popular if the rules for microfinance organisations are tightened. Those dealing with shadow creditors are not at all protected.
Last year marked the rollout of recent measures against telephone fraud alongside new measures. I would like to thank the State Duma for involvement in this work. I appreciate Mr Speaker’s efforts and attention to this issue, which helped pass critical legislative changes in short order.
Every month, banks suspend up to 300,000 transfers to suspicious accounts. These are tens and hundreds of billions of rubles saved.
Last year was the first year of fully-fledged information exchange between the Bank of Russia and the Ministry of Internal Affairs. Every month, we receive up to 20,000 requests from the Ministry of Internal Affairs. Banks rely on these data to promptly block fraudsters’ cards.
The self-ban on loans has been in effect for a little more than a month. When we presented our report last year, we raised this topic and agreed on the need for this legal framework, so thank you for the law. There is hardly another public service as popular.
It is really in high demand. The fact that people enable a self-ban on loans is also a sign of concern about credit fraud. The takeaway is that we need to make further efforts to counter fraud in the future.
In a short time frame, the State Duma passed a law against credit fraud and a trusted contact law, which is important for elderly people. Also, a very impactful law was initiated by the Government. The Ministry of Digital Development is building a national anti-fraud platform, with the Bank of Russia acting as a link between this platform and the banking system. This takes the fight against fraud to national level, and this is key to success given that any fragmented measures will not come through.
Last year, we saw the effects of earlier OSAGO decisions. This has always been deputies’ concern. In 2024, there was a drop in the average cost of ‘classic’ policies for ordinary drivers, but the average insurance benefit was up. As a reminder, the cost of policies was unchanged throughout 2023. That is, the real price of OSAGO adjusted for inflation has declined noticeably over the past two years, even despite the rise in component prices.
Speaking of the problems of OSAGO for taxis you have highlighted, the laws recently passed and the option of a short-term policy have helped improve things. The average cost of a two-day policy was ₽180.
There are still issues with OSAGO affordability in some regions where insurers are making losses due to fraudsters. While there were 12 regions with high risks of fraud two years ago, it is down to a third of them now. It is critical that this problem is addressed by regional authorities.
Another contribution of the financial system to the reduction of business and consumer costs is convenient and safe payments and money transfers.
The Faster Payments System enables businesses to save on fees, and we have calculated by how much. The saving totalled about ₽60 billion for last year, compared with average card fees, which are higher. We can see that increasingly more retailers are going for the FPS.
The potential scope of expansion for the FPS includes payments for kindergartens, interest groups and other state-owned institutions, and fines. We can see high demand for this from households. A further advantage of no-fee payments is instant crediting to the budget, since there can be no errors in payment details.
As regards the digital ruble, we are making preparations for a large-scale expansion of the experiment. There are plans for it to cover some tens of thousands of people by the end of the year, and to expand further.
I have mentioned the sanctions and how much they are complicating cross-border payments. They bring extra costs for businesses, but we have been working with businesses and have found workarounds. Our imports and exports were largely unaffected by these difficulties.
There are now alternative channels for settlements with foreign partners. Specifically, companies are testing digital financial assets; they are exploring cryptocurrencies as a means of payment as part of the experimental legal regime. Thank you very much for passing the relevant laws.
In conclusion, I would like to outline the Bank of Russia’s objectives for this year.
Number one is to deliver a decline in inflation. We are likely at the most difficult leg of this journey now, but we believe that inflation will come in close to our 4% target next year. Why is moderate inflation important? Time and time and again, I repeat that low inflation enables moderate loan rates. It is a prerequisite for long-term investment, and crucially, it means reliable protection of incomes and savings, and the path to poverty reduction.
Our second most important objective is to increase the stability of our banks and to control credit risks. When the rates are high, it is crucial for banks to promptly identify borrowers’ problems and restructure debt if necessary, as well as to insulate debt-laden companies from excessive debt accumulation.
The third objective is linked to the second; it is to develop the capital market. Investment can be raised through the issue of shares or through private equity. This does not involve a rise in corporate debts and lowers business sensitivity to interest rate changes.
Objective four is fraud decline, and we will do our uttermost to deliver this. I am sure that the overall effect of the measures will show up this year.
Now, the final objective is to develop the national payment infrastructure. Despite the external restrictions and sanctions, Russia is a global leader in this field, and we must retain our leadership. This brings strong benefits to households and businesses.
These are all challenging objectives, but I am sure that we can handle them. When I say ‘we’ I mean the Bank of Russia, the lawmakers, the Government and business collectively. The main thing we share is our understanding of the fundamental value of macroeconomic stability. This is the enabler of growth in disposable incomes, sustainable economic development and resilience to external shocks. All other subjects may be discussed in terms of priorities and timeframes, but I believe that macroeconomic stability is the absolute value to be protected.
Thank you.