1. Lomonosov Moscow State University Business School Anti-crisis State Policy in Russia Vera Kononova Institute for Complex Strategic Studies Lomonosov Moscow State University Business School 17 May 2016 1

2. Lomonosov Moscow State University Business School Seminar Outline 1.Anti-crisis Policy Goals The main goals and targets adopted by the Government of Russia and the Central Bank of Russia in 2014-2016 2.Anti-crisis activities of the Central Bank of Russia Monetary tightening, free float ruble exchange rate 3.Anti-crisis policy of the Government of Russia Recapitalization of banks, set of industrial policy measures (interest rate subsidies, project financing), budget subsidies for the certain kinds of loans Budget conservation as a limitation on Government initiatives

3. Lomonosov Moscow State University Business School 1.Anti-crisis Policy Goals

4. Lomonosov Moscow State University Business School Goals of fiscal and monetary authorities The Government of the Russian Federation The Central Bank of the Russian Federation “Our main goal is to slow down inflation to 4%” “We have a very complex task: to conduct structural reforms and prevent decline in living standards” Single goal Multiple goals

5. Lomonosov Moscow State University Business School Multiple goals of the Government Long-term goals Short-term goals Anti-crisis plans Ensure social stability (support for the most vulnerable groups) Support of “backbone” enterprises Support of the most affected industries (automobile industry, agriculture, housing construction, transportation and tourism services) Budget economy (maximum deficit 3% GDP per year) Structural reforms (accelerated dev-t of non-commodities production) and import substitution Institutional reform (the task to create encouraging environment for doing business) Modernization of infrastructure, facilities and technologies Budget economy (zero deficit)

6. Lomonosov Moscow State University Business School Inflation targeting goal of the Central Bank The Central Bank of Russia (CBR) adopted the inflation targeting policy that became the main direction of it’s activities in 2014-2016 Actual and targeted inflation Source: Rosstat, CBR Bank of Russia forecast Source: CBR Mid-term goal Actual

7. Lomonosov Moscow State University Business School How the anti-crisis policy is being conducted Economic and Social Stability Plan for 2015 (60 items) 2015 2016 The specific entities are responsible for monitoring the economic situation and implementation of anti-crisis action plans Government’s action plan for 2016 (120 items) The Anti-crisis Plans of the Government Governmental Commission for economic development and integration (Ministers, head of the CBR, heads of the major banks and development institutions, governors, academic experts) Governmental Commission for economic development and integration (Ministers, head of the CBR, heads of the major banks and development institutions, governors, academic experts) 4 interdepartmental working groups under Ministry of Finance, Ministry of Economic Development, Ministry of Industry, Ministry of Agriculture Interdepartmental Working Group (deputy ministers, deputy head of the CBR, rep-s of other departments and entities) Regional anti-crisis commissions Companies, industrial unions

8. Lomonosov Moscow State University Business School 2. Anti-crisis activities of the Central Bank of Russia

9. Lomonosov Moscow State University Business School Main directions of the CBR policy Policy instruments in 2014-2016  High interest rates - to stop capital outflow and bring the inflation down  Tight bank control (compliance with the new banking regulations)  “Free float” of ruble exchange rate (end of 2014) Policy instruments in 2014-2016  High interest rates - to stop capital outflow and bring the inflation down  Tight bank control (compliance with the new banking regulations)  “Free float” of ruble exchange rate (end of 2014) Main building of the Central Bank of Russia (Moscow)

10. Lomonosov Moscow State University Business School Interest rate policy in 2014-2016 DateCBR Key rate, % Feb 3, 20145,75 Mar 3, 20147,0 Apr 28, 20147,5 Jul 28, 20148,0 Nov 5, 20149,5 Dec 12, 201410,5 Dec 16, 201417,0 Feb 2, 201515,0 Mar 16, 201514,0 May 5, 201512,5 Jun 16, 201511,5 Aug 3, 2015 - present11,0 After the sharp increase in Dec 2014, the key rate of the CBR is still kept on high level of 11%. This results in the high interest rates for all kinds of loans. Interest rates for loans to non-financials (<1 year) Source: CBR

11. Lomonosov Moscow State University Business School Banking system control Since 2014, the CBR follows the policy of strict banking control. Failure to comply with the rules of the CBR results in license revocation License revocation summary In 2014 the regulator revoked licenses from 84 credit institutions for the unsatisfactory quality of assets, loss of capital, risky lending policies and dubious transit transactions In 2015 the licenses were revoked from 93 credit institutions In Q1 2016 – from 32 banks As of March 1, 2016, Russian banking system consisted of 665 banks License revocation summary In 2014 the regulator revoked licenses from 84 credit institutions for the unsatisfactory quality of assets, loss of capital, risky lending policies and dubious transit transactions In 2015 the licenses were revoked from 93 credit institutions In Q1 2016 – from 32 banks As of March 1, 2016, Russian banking system consisted of 665 banks Source: CBR

12. Lomonosov Moscow State University Business School Deviation of RUB/USD exchange rate from year average In November 2014 the CBR declared the free float of ruble exchange rate. That was followed by a 2-fold devaluation and sharp increase in volatility. Ruble exchange rate Source: CBR, ICSS estimates Nominal and real exchange rates for RUB/USD

13. Lomonosov Moscow State University Business School 3. Anti-crisis policy of the Government

14. Lomonosov Moscow State University Business School Main directions of the Government policy The most important policy instruments in 2014-2016  Recapitalization of banks in 2015  Providing accessible loans for selected investment projects  Regional development mechanisms  Attempts to minimize budget deficit The most important policy instruments in 2014-2016  Recapitalization of banks in 2015  Providing accessible loans for selected investment projects  Regional development mechanisms  Attempts to minimize budget deficit The House of the Government of Russia (Moscow)

15. Lomonosov Moscow State University Business School Recapitalization of banks The aim of the program is to expand the opportunities of banks to provide business loans and home loans Federal Budget Association for Deposits Insurance Bank 1 Bank 2 Bank N... Subordinate loans (gov-t bonds) Loan volume: equal to 25% capital (7,5% for regional banks) Obligation to expand home loans, loans to companies (SMEs and companies from the list of priority industries) to at least 12% per year Eligible banks (initially): capital > 25 bln rub (only 30 banks satisfy), share of consumer loans < 40% in total loans (27 banks selected) CBR Refinancing Mid-2015: regional banks with capital > 5 bln rub (10 banks selected) Source: Acts of RF Government, CBR

16. Lomonosov Moscow State University Business School Accessible loans This group of programs aims to provide cheaper funding for the selected projects, however, the total amount of funding is much less than demanded ProgramsInterest rate, % Comments Project Financing Program (2015) 11-11,5%Banks provide loans for selected priority projects (then the loans are refinanced by the CBR). In 2015 42 projects received 232,5 bln rub (3 bln EUR). Loans from Industrial Development Fund (2015- 2016) 5%In 2015 the Fund selected 74 priority projects out of 1282 applications. Total funding was 20 bln rub (~250 mln EUR) Home Loans with Government Support (2015-2016) < 12%In 2015 the authorized banks received a 3,5% budget subsidy for home loans with lower rate (12% or less) for new construction. The share of subsidized loans on home loan market was about 40-50% in 2015. Source: Acts of RF Government, mass media

17. Lomonosov Moscow State University Business School Regional Development Mechanisms The Far East of Russia is priority region, where “accelerated development territories” and other mechanisms were introduced in 2014-2015 Far East Development Fund Ministry for Development of Far East Free Port Vladivostok 9 Low-tax and duty-free business parks with new infrastructure Low-tax and duty-free logistics zone Government of Russia Far East Development Corporation Accelerated development territories The Regions of Far East of Russia

18. Lomonosov Moscow State University Business School The Task of Budget Conservation The task of minimization of federal budget deficit by no more than 3% GDP imposes limits on many Government anti-crisis initiatives. Source: Ministry of Finance Federal budget balance Sovereign oil funds Source: Ministry of Finance

19. Lomonosov Moscow State University Business School Decline of oil and gas revenues Before 2015, about 50% of federal budget revenues were “oil and gas revenues”. In 2015 their share decreased to 42,9%, in Q1 2016 – to 34% Structure of federal budget revenues Source: Ministry of Finance Export duties on oil, gas and petroleum products Revenues from Natural resource Tax on oil and gas The dropdown in these revenues was observed despite the devaluation of ruble

20. Lomonosov Moscow State University Business School Public expenditures in Russia (federal level) The largest part of federal budget goes to high priority goals: social aid and national defense Source: Ministry of Finance

21. Lomonosov Moscow State University Business School Thank you for your attention!