Bloomberg News

Russia Locked in ‘Huge’ Rates Feud, Shuvalov Says

January 21, 2013

Russia's First Deputy Prime Minister Igor Shuvalov

Igor Shuvalov, Russia's first deputy prime minister, seen in this Dec. 3, 2012 photo, said inflation is a priority for the government, which wants to eventually keep consumer-price growth below 4 percent. Photographer: Scott Eells/Bloomberg

Russia’s central bank is resisting calls to cut interest rates, sparking a “huge argument” with the government over priorities as economic growth slumps, First Deputy Prime Minister Igor Shuvalov said.

Russia needs “easier money” to boost corporate lending, Shuvalov, 46, said in a Jan. 18 interview during a train ride to Moscow from Kaluga. Bank Rossii, the country’s central bank, has room to cut borrowing costs by as much as a percentage point and is resisting as it fights inflation, he said.

Shuvalov, Russia’s top official for economic policy, is amplifying pressure from Cabinet members on the central bank to cut borrowing costs as growth slows to half the government’s 5 percent target. The unprecedented clash is playing out in public, raising the stakes for the successor of central bank Chairman Sergey Ignatiev, whose term expires in June.

“We’re trying to persuade them, always, that now they need to reduce the rate,” Shuvalov said. “And they say, not yet. We think they could.”

Inflation is a priority for the government, which eventually wants to rein in consumer-price growth to less than 4 percent, Shuvalov said. That would send a positive signal to investors after inflation surged to 6.6 percent in 2012, faster than the previous year and above the central bank’s target.

Monetary-policy makers left borrowing costs unchanged this month after unexpectedly raising them in September. They removed a phrase from their statement that market rates were acceptable for the “nearest future,” which central bank First Deputy Chairman Alexei Ulyukayev said opens the door for increases or decreases as soon as next month.

Ignatiev’s Succession

President Vladimir Putin will nominate a candidate to replace Ignatiev in March, three months before the current chairman’s third and final term ends, Shuvalov said.

“Mr. Ignatiev was and is a brilliant central bank chairman,” Shuvalov said. “Ignatiev worked quietly and slowly to achieve results.”

The government has been increasingly vocal in its debate with the central bank, with Finance Minister Anton Siluanov and Deputy Economy Minister Andrei Klepach arguing for easier credit last week. Still, the regulator is following its legal obligation to do as it sees fit on questions of interest rates and inflation, Shuvalov said.

“They work completely independently,” he said. “And we argue very often. And they ultimately can say that ‘we work based on our law.’”

‘Counterproductive’ Easing

Easing monetary policy with lower rates would be “counterproductive” and “likely to produce new imbalances, new risks for different segments of the economy,” Ulyukayev said Jan. 16 in comments at the same economic forum where Siluanov and Klepach spoke.

Even with lower borrowing costs, the government would also need to do its part to boost growth to a stable 5 percent, Shuvalov said. Economic output is projected to grow 2.4 percent in the fourth quarter from a year earlier, according to the median of 15 estimates in a Bloomberg survey. That would be the weakest pace since growth resumed in 2010 after a recession.

Priorities include developing eastern Siberia and the Far East, increasing trade with Asia and diversifying the economy, said Shuvalov, who oversaw Russia’s preparations for the Asia- Pacific Economic Cooperation summit.

Imperfect Economy

“The structure of our economy is not perfect and we depend on oil and gas a lot,” he said. “And on the metals. We need direct foreign investment. The level should be much higher than at the moment.”

State-asset sales must differ from privatizations in the 1990s, which were criticized for lacking transparency, Shuvalov said. A lawyer by training, he joined the government as a property official in the late 1990s and became Cabinet chief of staff in 2000, going on to hold posts in the presidential administration until taking his current position in 2008.

“We speak openly with all possible investors, domestic and international,” Shuvalov said. “We would like to sell in such a way that the public appreciates this, understanding it is a fair price.”

The government’s decision to impose spending caps on revenue from oil and gas starting this year will bolster state finances by reducing the dependence on oil income. Revenue from the industry accounted for 50.2 percent of federal budget earnings last year, according to preliminary Finance Ministry data published Jan. 18.

Russia’s international currency and gold reserves are the world’s fourth largest, trailing China, Japan and Saudi Arabia. They grew $39 billion last year to $537.6 billion as of Jan. 1, according to central bank data.

European Rescues

Still, that doesn’t mean Russia can afford to rescue European countries, where debt crises have threatened global growth, without first thinking about its domestic needs, Shuvalov said. The government moved 900.2 billion rubles of 2012 energy revenue to the Reserve Fund, which can be used to finance future budget deficits, the Finance Ministry said today.

“We need to be very frugal at the moment, very conservative,” Shuvalov said, adding that the government isn’t prepared to write off a 2.5 billion-euro ($3.3 billion) loan to Cyprus given in 2011.

Russia is facing calls from other Cyprus creditors to participate in a new bailout, including the possibility of forgiving some of the loan, the Welt am Sonntag newspaper reported on Jan. 19, citing unidentified German government officials. German Finance Minister Wolfgang Schaeuble told lawmakers last week that Russia must participate in a euro-area bailout.

“I don’t want to provide any money for Cyprus,” he said, adding that Russia hadn’t yet responded to a request from the island for a new loan. “We have so many friends and partners who would like to receive some loans from us.”

To contact the reporters on this story: Scott Rose in Moscow at rrose10@bloomberg.net; Ryan Chilcote in London at rchilcote@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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