Monetary policy spillovers: the case of 2014 shock in Russia Bank of Russia Research and forecasting Department Zurich, May 10, 2017
Monetary spillovers channels Exchange rate channel Domestic demand channel Financial spillovers Source: IFDP Notes International Spillovers of Monetary Policy by John Ammer, Michiel De Pooter, Christopher Erceg, and Steven Kamin 2
YTM, % Financial shock in 2014 2014 dual shock of falling oil prices and external financing constraints Russia sovereign USD eurobonds index 10 Investment rating corporate USD eurobonds index 9 8 7 6 5 4 3 2013 2014 2015 2016 2017 Source: Cbonds 3
Financial shock in 2014 19 Local government bond (OFZ) yield, % 1 year 10 years 17 15 13 11 9 7 5 2013 2014 2015 2016 2017 Source: Cbonds 4
Rapid deleveraging Accelerated foreign debt accumulation in 2010-2014 was followed by rapid deleveraging in 2015-2016 220 210 200 190 180 170 160 150 140 130 External debt by sectors, USDbn Banks (lhs) Other sectors (rhs) 460 440 420 400 380 360 340 320 300 280 120 260 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Bank of Russia 5
Risk premium fell back to average EM level 700 Russia and other EMs average 5 year CDS premium EM* Russia 600 500 400 300 200 100 2013 2014 2015 2016 2017 * Average of Bulgaria, Hungary, Poland, Mexico, Brazil, South Africa, Turkey, Indonesia etc Source: Bloomberg Financie L.P. 6
Volatility returned to pre-shock level Oil price and RUB volatility, % annualized 120 1 month realised Brent volatility 1 month implied RUB/USD volatility 1 month realised RUB/USD volatility 100 80 60 40 20 0 2013 2014 2015 2016 2017 Source: Bloomberg Finance L.P. 7
What policy mix allowed to smooth the shock? 8
USDbn Shift to IT and flexible exchange rate regime Nov 2014 Bank of Russia shifted to inflation targeting and flexible exchange rate regime Bank of Russia monthly operations on FX market 10 5 Amount of US dollars sold Amount of US dollars bought 0-5 -10 Interventions made for financial stability purposes -15-20 Bank of Russia -25 switched to inflation targeting and flexible exchange rate regime -30 2013 2014 2015 2016 2017 Source: Bank of Russia 9
Monetary policy tightening Bank of Russia policy rates and overnight money market rate 20 18 16 14 12 10 8 6 Overnight credit rate Key rate Overnight deposit rate RUONIA 4 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Source: Bank of Russia, Bloomberg Finance L.P. 10
RUB depreciation caused a shift in relative prices 290 270 250 230 210 190 170 150 130 110 EM currencies dynamics, index Jan 13 = 100 Russian Ruble Indian Rupee Brazilian Real Depreciation against USD Turkish Lira South African Rand Mexican Peco 90 2013 2014 2015 2016 2017 Source: Bloomberg Finance L.P. 11
which sent inflation above 15% 20 Inflation, % y/y 16 12 8 4 0 2002 2004 2006 2008 2010 2012 2014 2016 Source: Rosstat 12
Fiscal consolidation plan 12 Federal budget deficit, % of GDP 10 Deficit Non-oil deficit 8 6 4 2 0 2013 2014 2015 2016 2017 2018 2019 Source: Ministry of Finance, Rosstat 13
Russia has positive net IIP Net International Investment position of Russian Federation 1600 1400 1200 1000 Net International investment position (rhs) Assets Liabilities 400 300 200 800 100 600 400 200 0-100 0 2001 2003 2005 2007 2009 2011 2013 2015 2017-200 Source: Bank of Russia 14
USDbn FX liquidity shortage covered by FX repo Commercial banks liabilities to Bank of Russia via FX repo 35 30 7 days 28 days 12 months 25 20 15 10 5 0 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Source: Bank of Russia 15
Balance of payments adjustment Current account and capital outflow as % of GDP 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Net private capital outflow (+)/inflow (-) Current account 2002 2004 2006 2008 2010 2012 2014 2016 Source: Bank of Russia 16
Strong incentives for deposit de-dollarisation 14 12 Retail deposit rates, % spread USD RUB 10 8 6 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Bank of Russia 17
FX debt is gradually replaced by local currency debt Non-bank sectors debt growth decomposition, % y/y Source: Bank of Russia, Cbonds, Bloomberg Finance L.P. 18
Recession was moderate 2 GDP, % q/q SA 1 0-1 -2-3 2010 2011 2012 2013 2014 2015 2016 Source: Rosstat, Bank of Russia seasonal adjustment 19
Russia is less exposed to risks of Fed policy normalization Although Bank of Russia gradually lowers policy rates differential with Fed rate stays high both in nominal and real terms 19 17 15 13 11 9 7 Difference Russia key rate Fed funds rate - upper bound (rhs) 1,25 1,00 0,75 0,50 0,25 5 Sep-13 Sep-14 Sep-15 Sep-16 0,00 Source: Bank of Russia, Federal Reserve 20
but not fully immune Some EM countries have weak external position with excessive external debt accumulated under the loose DM monetary policy Some countries face shocks coming from political uncertainty both internally and externally So far this year EMs saw strong capital inflows as Fed policy normalization pace is believed to be very careful and moderate Yet, capital flows may reverse causing capital flows from EMs as a whole 21
Lessons from Russia Huge external shock caused rapid BoP adjustment via deleveraging and RUB depreciation Switch to flexible exchange rate regime and inflation targeting accompanied by tight monetary policy allowed to smooth the shock Balanced fiscal policy and visible fiscal consolidation plan contributed to macroeconomic stabilization FX liquidity shortage was covered by Bank of Russia FX repo operations 22
Spillovers to CIS countries Decreased domestic demand hit some CIS exporters RUB depreciation and falling real wages and incomes impacted work remittances flows to CIS countries 23
Thank you! 24