The President also informed Ms Nabiullina that he would propose to the State Duma that they renew her mandate as Governor of the Central Bank.
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President of Russia Vladimir Putin: Ms Nabiullina, let’s discuss the results for 2016 and the start of 2017. How do you assess the situation?
Governor of the Central Bank Elvira Nabiullina: Overall, the situation is normalising and developing. Looking at the financial sector, we see that adaptation to the new conditions is complete now. If you recall, four years ago, we planned some changes to address problems that had built up with regulation and oversight in the financial sector. Of course, external events such as the big drop in oil prices and the restrictions on our financial institutions’ access to external markets had a big impact on our work. We were obliged to take additional measures in order to help the financial sector adapt to the new situation, and, most importantly, help the economy to adapt.
As we see it, the assessments show that 2014–2015 were difficult years for the banking system. They lost profits (profits fell up to five-fold) and their bad assets increased. But the results for 2016 show that the banking sector has either returned to the pre-2014 levels in most areas, or even surpassed them. Profits and capital have recovered. We think the banking system is ready now to increase lending, on a healthy and good-quality basis, what’s more, in order to avoid risks for banks’ depositors and creditors.
Over this time, we continued our policy of cleaning up the banking system, despite the difficult circumstances, because problems really had built up and some banks’ assets existed only on paper. When the economy is growing, this is not hard to hide, but when the economy runs into difficulties, it all becomes evident very rapidly. Over these last four years, we have been forced to revoke the licences of more than 300 banks and 317 lending organisations.
In 70 percent of cases, one of the reasons, sometimes the main reason, was that these banks were taking part in the shadow economy and were involved in dubious operations. We see progress now, because when we began this work actively in 2013, we estimated illegal capital outflow at 1.7 trillion, but we estimate that it came to around 183 billion in 2016. This is still a lot, but it is nonetheless a nine-fold drop. The same is true for turning funds into cash. We estimated this at 1.2 trillion when we began, and now it is slightly more than 500 billion. There is still work to do here, though.
The problem is that not only banks are involved in this. We were forced to go through the banking system, which is the infrastructure, to resolve problems with the dubious operations that were taking place in payment terminals. We succeeded in resolving this problem, including with the use of postal service infrastructure and going through the travel agencies.
The problem today is the use of enforcement orders. They are being used to take money out, and we see that operations of this kind are on the rise. This shows that there is no room for complacency, because illegal revenue, attempts to take capital out of the country, attempts to turn it into cash, all put pressure on the system and are on the lookout for any possible loopholes. We will continue to work actively in this area.
Vladimir Putin: You asked me to help you with relations with the law enforcement agencies. How is this work organised?
Elvira Nabiullina: This cooperation has improved and become more effective, and far more cases are opened now following our requests. We are now working in two areas with the law enforcement system. Aside from our routine work and briefings, there is the issue of falsified accounts and reports. It seems we need legal amendments, and we are currently working on this with the law enforcement agencies. We are also working with them on the problem of the so-called ‘runaway bankers’ – when people leave the country. We are holding inter-agency discussions on this issue. There are several proposals on how to resolve this problem, but we see that it can be resolved.
There is another problem for which we also put forward an initiative. It concerns bank secrecy. The Central Bank has always taken a hard line on the transfer of information related to bank secrecy to whoever, because this is an important element of trust in the banking system. However, sometimes we get a vicious circle, when we inform law enforcement agencies about certain violations and they do not have sufficient grounds for opening a criminal case because they lack the relevant information. They may only receive it once criminal proceedings are initiated. So we propose transferring documents covered by bank secrecy when there are signs of such violations, and only in such cases, to ensure that criminal proceedings are initiated as soon as possible and to hold the owners and managers of such banks to account in a more effective manner.
Vladimir Putin: The return of term deposits should be guaranteed.
Elvira Nabiullina: Yes, it should be guaranteed unconditionally, because what often happens is that days before [a bank’s] license is revoked, [its] assets are stripped, and here it is important for us to protect depositors’ and investors’ rights.
However, it needs to be said that overall, the deposit insurance system is quite effective. It may be recalled that in 2015 we actually doubled insurance coverage – from 700,000 to 1.4 million [rubles]. The system helps streamline the banking sector.
There is another area to which I would like to draw your attention. Negative factors have revealed the vulnerability of our financial system. Not all the essential infrastructure elements have been put in place in our country. I mean, for example, the plastic cards system and the payment card processing system in general. At that time we transferred all operations on international cards to domestic processing quickly enough, in less than a year. Last year, 2016, our efforts were focused on creating complete infrastructure for using our own Mir cards. At present, over 90 percent of ATMs and payment terminals are ready to process Mir cards and we consider 2017 important, crucial for the use of Mir cards on a large scale.
The vulnerability of our reinsurance system was also revealed. We did not have sufficient reinsurance capacity and last year legislation was passed – thank you for supporting this draft law – and in the second half of the year we established a risk reinsurance company, reinsuring risks especially for our enterprises subject to sanctions, and it is gaining momentum.
There were similar threats related to our suspension from the SWIFT system. We also upgraded our payments system, and should something happen in the country all operations in the SWIFT format will proceed as usual. We have created a SWIFT analogue and the basic elements of financial market infrastructure that were lacking were put in place.
Here, it was probably very important that in 2013 the Central Bank became a mega regulator and so we were able to take a comprehensive view of the financial market as a whole. A lot of work still lies ahead on closing regulatory gaps and tightening oversight not only over the banking sector but also over insurance companies and non-state pension funds.
From our perspective, this is a very important area because overall, they are not very well developed. Their total assets account for about 10 percent of GDP. Whereas the banking system’s assets already slightly exceed GDP – here, there is huge potential for long money and generally, for ensuring that the financial sphere makes a bigger contribution to economic growth, to investment and economic growth. There are still plenty of problems here, including in mandatory third-party liability insurance, which is a highly sensitive sector. We have yet to address all its problems. New legislation is pending and we hope that the situation will improve.
Such are the results of our work in the past four years.
Vladimir Putin: Good.
Your term of office is coming to an end.
Elvira Nabiullina: It expires in late June 2017. Under the law, the President names a new candidate three months before the term is due to expire.
Vladimir Putin: Ms Nabiullina, you headed up the Central Bank at a difficult time for both the global and the Russian economy. During this time the bank has emerged as an even more important regulator – as you have just said, a mega regulator. It regulates virtually the entire financial market, the entire financial sphere. The Central Bank is crucial for the health of the Russian economy as a whole. Whatever the Central Bank does at this difficult time, whatever steps it takes, this always elicits a response from expert circles and from the public, and whatever the Central Bank does is always a subject of debate.
Having said that, it is perfectly obvious that under your leadership, the Central Bank has done a great deal to stabilise the economic situation in general and to ensure the stable development of the banking sector, as well as the entire financial system. I very much hope that under your leadership, our leading financial institution, our main financial regulator will continue to work just as confidently, making necessary and timely decisions. I therefore intend to submit your candidacy to the State Duma for a new term as Central Bank Chair.
Elvira Nabiullina: Thank you very much, Mr President. Thank you for your continuing trust. I am confident that in working to meet the goals set by the law, the Central Bank will make a positive contribution to the development of the Russian economy.