Russia’s next central bank chairman will have scope to meet Vladimir Putin’s call for lower borrowing costs as yields on the shortest-maturity debt fall and economists predict the fastest inflation in 18 months will ease.
The yield on government ruble bonds due in March 2014 fell eight basis points since Putin’s March 12 nomination of Elvira Nabiullina, an aide and former economy minister, to replace Bank Rossii Chairman Sergey Ignatiev when his term expires in June. The rate on a gauge of emerging-market government debt compiled by JPMorgan Chase & Co. increased two basis points in the period.
Nabiullina, 49, will take over after Ignatiev resisted government pressure to cut rates as inflation surpassed the central bank’s 5 percent to 6 percent target for six straight months. The steepest economic slowdown in three years coupled with central bank forecasts that consumer-price growth will slow in the second half and may free her to lower borrowing costs without damaging the central bank’s credibility.
“As inflation will come down in the second half, they will have the opportunity to be more dovish, irrespective of the central bank head,” Viktor Szabo, who helps oversee $11.8 billion at Aberdeen Investment Management Ltd. in London, said March 15 by e-mail.
Bank Rossii kept its main interest rates unchanged on March 15. The refinancing rate, which is currently at 8.25 percent, will fall to 7.88 percent in the fourth quarter, according to the median estimate of economists surveyed by Bloomberg. The auction-based repurchase rate and overnight deposit rate will be cut by a quarter of a percentage point in the third quarter, surveys show.
Putin picked Nabiullina, who graduated from Moscow State University with an economics degree in 1986, as the $2 trillion economy grows at the weakest pace since a 2009 contraction. Should lawmakers endorse her nomination, Nabiullina will become Russia’s first new central bank chief in more than a decade. After serving as the country’s economy minister from 2007 to 2012, she left to become an aide to Putin in the Kremlin following his election to a third term in May.
While investors are concerned Nabiullina won’t be free in her decisions, her move to appoint Ignatiev as an adviser means no radical policy changes should be expected, said Konstantin Artemov, who helps oversee about $180 million in Russian bonds at Raiffeisen Capital in Moscow.
“Given the current rates in the economy, including investment growth rates, there are few tools to stimulate growth other than rate cuts,” he said by phone on March 15.
Ignatiev said Feb. 15 that he hopes inflation will decelerate in the coming months, making rate cuts possible. Inflation, which accelerated to 7.3 percent in February, will slow to 5.8 percent in December, according to a median forecast from a Bloomberg survey of 10 economists.
Gross domestic product increased 1.6 percent from a year earlier in January, compared with 2.4 percent in December, missing Prime Minister Dmitry Medvedev’s 5 percent long-term growth goal. The central bank said March 15 that it will monitor “inflationary risks and risks of the economy cooling,” while omitting a phrase in the statement after February’s meeting that the economy was expanding at its potential.
Inflation has been stoked by a bad harvest and higher excise taxes and transport costs. It will probably start slowing in May or June, according to Vladimir Osakovskiy, the Moscow- based chief economist at Bank of America Corp.
“As soon as such concerns will start fading, the central bank will be ready to provide stimulus,” Osakovskiy said March 15. He expects cumulative cuts of 75 basis points this year.
The tone of the central bank’s March 15 statement was “a bit more dovish,” and the shift in rhetoric may mean the central bank will start cutting rates as early as next month, Maxim Oreshkin and Daria Isakova, analysts at VTB Capital in Moscow, said in a note after the meeting.
At the start, Nabiullina will be as focused on inflation targeting as Ignatiev, according to Luis Costa, a London-based strategist at Citigroup Inc. While it’s unlikely Nabiullina will depart radically from Ignatiev’s path, there may be changes toward “the dovish side,” he said by phone on March 15.
The ruble weakened 0.6 percent against the dollar to 30.8255 by 1:23 p.m. in Moscow. The country’s dollar bond due in April 2042 gained, lowering the yield two basis points to 4.72 percent.
Russia is ranked BBB by Fitch Ratings, the second-lowest investment grade. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries gained five basis points to 190, according to JPMorgan Chase & Co. indexes. The difference compares with 181 for debt of similarly-rated Mexico and 183 for Brazil.
The cost of protecting Russian debt against non-payment for five years using credit-default swaps rose three basis points to 142 basis points, according to data compiled by Bloomberg. The swaps cost 13 basis points more than Turkey, which is rated one step lower by Fitch at BBB-. The contracts pay the buyer face value in exchange for underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
Nabiullina was born in Ufa, the capital of the republic of Bashkortostan in the southern Urals Mountains, nearly 1,200 kilometers (750 miles) east of Moscow. In the early 1990s she worked at the Russian Union of Industrialists and Entrepreneurs, a lobby group for the country’s biggest businesses.
Putin said March 7 that he was planning a surprise candidate for the post. Former finance minister Alexei Kudrin, Alexei Ulyukayev, a Bank Rossii first deputy chairman, and VTB24 President Mikhail Zadornov were among candidates considered to succeed Ignatiev, three officials with knowledge of the talks said in January.
Nabiullina was a first deputy to then-Economy and Trade Minister Herman Gref, now chief of OAO Sberbank, from 2000 to 2003 before becoming head of the Center for Strategic Research, which helped develop Putin’s economic policy during his first two terms. In her role as a minister for almost five years, she helped Russia conclude almost two decades of talks on joining the World Trade Organization last year.
“As an economy minister, Nabiullina proved herself as a person with individual views and as a serious debater,” Vladimir Pantyushin, chief economist for Russia and the CIS at Barclays Plc’s investment-banking unit in Moscow, said by phone March 15. “Rates will most likely only be cut in September” when inflation approaches 6 percent, he said.
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