Central Bank Deputy Sees Interest Rate Cut Soon

Russia has come out of the sharpest phase of its economic crisis, capital outflows have ceased and foreigners are returning to Moscow stocks, Central Bank First Deputy Chairman Alexei Ulyukayev said Friday. He also indicated the economy may get a further boost from interest rate cuts, which could start as soon as the second quarter thanks to easing inflationary pressures. A collapse in growth and steady devaluation of the ruble has posed the biggest challenge yet to the popularity of Russia's Prime Minister Vladimir Putin, who stepped aside from the presidency last year. Officials now seem to be diverging in tone, with some taking heart from stabilizing oil, which pushes the ruble and stocks up and helps improve economic data, while others like Finance Minister Alexei Kudrin insist it is too soon to relax. "I think the sharp phase [of the crisis] has passed," Ulyukayev said in a interview on Ekho Moskvy radio station. "We may not like it very much because of falling industrial output … high inflation, but it is a balanced situation." "There is an inflow into the stock market — we see how quickly our bourses are growing in February-March — [and] foreign direct investments are continuing," he added. Russia's MICEX stocks index has surged 37 percent since the start of the year, while the broad MSCI emerging markets benchmark has added just 6 percent. Ulyukayev was also upbeat on the ruble, saying it could average 32-33 per dollar this year rather than the 35.1 level factored into the budget. The Central Bank has revised its 2009 capital outflows call and now expects them to be less than the $83 billion factored into the government budget. Its new forecast has not been made public yet, but Ulyukayev said it could be cut further. Russian officials have resisted calls for interest rate cuts to boost the economy as they dealt with a ruble sell-off, saying that the key refi rate should not be lower than inflation, which is currently running at an annual rate of 13 percent. Ulyukayev signaled that could change as price pressures are set to ease. "I think in the second quarter it is quite realistic to expect cuts in the official refi rate and in rates for most of our liquidity instruments. … The step of course will be small but it is important to signal a trend," he said. Risks remain, however, not least in the banking system, where the rise in non-performing loans is seen as a big threat. Ulyukayev said the Central Bank would urge financial institutions to take preventative measures by building up reserves against potential bad debts. He said as long as overdue loans do not top 10 percent of the credit portfolio, the banking system should be able to cope without major problems. "If it is more than 10 percent, then it is a problem for the banking system as a whole," he said, declining to give a forecast. Peter Aven, president of Russia's top private bank Alfa Bank, forecast bad loans could hit 15-20 percent by year-end. In an interview with the Financial Times he also predicted hundreds of bankruptcies in the 1,200-strong Russian banking sector