Everything that does not prohibit us is allowed – Newspaper Kommersant No. 141 (7342) dated 08/05/2022

The Bank of Russia published for public discussion the report “Financial Market: New Challenges in Modern Conditions”. The main proposed new ideas: the financial sector does not yet need state support, if it is needed, the market itself will pay for it, changes are needed in the concepts of state support for the economy, liberalization and technologization of markets wherever possible, and maximum rigidity towards non-residents from “unfriendly” countries and to their “toxic” currencies.

The formally published report of the Bank of Russia on Thursday (.pdf) is a “discussion document”, part of the Central Bank’s communications with the market, dedicated to strategic issues, while, as a rule, these reports of the regulator are devoted to specific issues – for example, the corresponding document was issued by the Bank of Russia on the concept of introducing the “digital ruble”. The report under discussion is much broader: although the Central Bank clarifies that it covers “not all tasks to be solved in the medium term,” it refers to the alleged position of the Bank of Russia on most debatable issues related to the working conditions that have changed since the start of the Russian military operation in Ukraine financial markets. The fully medium-term strategy of the Central Bank will be updated in the fall-winter of 2022 in the “Main Directions for the Development of the Financial Market” (ONR FR) for 2023-2025, the discussed report of the Central Bank is called upon to supplement the ONR based on the results of the discussion (briefly – market positions are accepted by the Bank of Russia until September 1) FR.

Recall that in the current model of public administration, the thesis of the “independence” of the Bank of Russia from other branches of government applies primarily to monetary rather than regulatory policy, which the Central Bank implements in fairly close cooperation with the Ministry of Finance and other government departments. Because of this, the report is largely a declaration by the Bank of Russia of how the current domestic political principles and the restrictions they impose on the ideology of the regulator (which in the Russian Federation more often and more confidently than other government structures declare the principles of openness of the economy and the primacy of the welfare of the population over “state interests”) “translated” into specific elements of the short-term and medium-term strategy of the Central Bank. Among the Bank of Russia’s “prerequisites” when compiling the report, among other things, are “maintaining the openness of the Russian economy” – with the prospects of “expanding foreign trade and financial relations with friendly countries” and “preserving or strengthening the role of the state only in those areas and in addressing only those tasks that the market cannot cope with effectively, but which are of great importance for the Russian economy”. This, in addition to the declaration of the priority of consumer interest in the activities of the Bank of Russia and actions taking into account the need for competition, is a political declaration, while the Central Bank itself in the text makes it clear that the “model of the Russian economy” in the current conditions, in its opinion, is not predetermined.

Technically, the document covers several thematic fields, from the position on information disclosure and financial transparency in the face of sanctions to the future of foreign exchange regulation and the derivatives market.

In almost the entire text, the Central Bank is focused on maintaining the sanctions of large economies, confrontation with “unfriendly” jurisdictions, the need for a development model based on domestic investment and the development of the national financial market. Some positions of the Bank of Russia have already been declared and officially confirmed in the report. Recall that this is the first non-technical and at the same time documentary statement of the regulator about its policy outside the monetary policy since March 2022, in regular statements by the Chairman of the Central Bank Elvira Nabiullina and representatives of the Bank of Russia, the central bank rather avoided detailed explanations about what it intends to do in a significantly changed working conditions. Some other points are formulated for the first time.

Apparently, the most important statement of the Central Bank to the market is a confirmation that, according to the Bank of Russia, the March-April shocks will not require a systemic additional capitalization of the financial sector – the market will stabilize on its own in the medium term.

However, the Central Bank “may consider”, in case of increased pressure on the Russian Federation, the issue of such support – in the form of an autonomous fund for supporting the financial sector according to the model of the Deposit Insurance Agency, that is, at the expense of deductions from financial intermediaries. Such a “DIA-2”, as expected, can insure the capital of banks and financial organizations against force majeure, but not from the consequences of the implementation of risky business models. The “insurance” model is attractive for the Central Bank; in another paragraph, the Bank of Russia calls for the completion of the creation of a system for guaranteeing pension savings – insurance payments for up to two social pensions, which covers the savings of 99% of participants and the payment of non-state pensions of 93% of pensioners.

The second important block of questions is the approach of the Central Bank to a way out of the situation that has developed after the mutual blocking of assets of financial institutions with “unfriendly” countries.

Here the Bank of Russia takes a consistent “hawkish” position: in all cases – only mutual concessions, lifting restrictions on the assets of non-residents in the Russian Federation is possible only in the event of unfreezing the assets of the Russian Federation abroad. The Central Bank rejects the repurchase of the assets of financial organizations-residents of the Russian Federation blocked in “unfriendly” jurisdictions in principle. In matters of currency regulation, the principle is the same: “requirements for residents should be maximally liberalized, while the severity of the requirements for non-residents should vary depending on their jurisdiction.” The currencies of “unfriendly countries” have been declared “toxic”, “limited circulation”, the Bank of Russia is happy with this – as part of the devaluation, the reduction of transactions in such currencies will be fully supported. The Central Bank is considering a variety of measures in this regard, up to the government’s recommendations to state-owned companies to refuse contracts in “toxic” currencies (the Ministry of Finance on Thursday already expressed doubts about the appropriateness of such a tough approach).

Important in the document is the position of the Central Bank on the regulation of ecosystem business, ESG, support for IT development and platforms, the digital ruble: it is emphasized that it has not changed and, in the light of changed conditions, has become even more relevant. The Bank of Russia also insists that foreign platforms and ecosystems ready to work in the Russian Federation should not be discriminated against, and conditions should not be created for tax, customs or other arbitration. The “platformization” of business is now supported by the regulator even in more energetic and confident statements than before March 2022.

In the recovery of the banking sector, the regulator is considering the possibility of “introducing risk-based regulatory incentives in economic development projects” with a possible limit on the total volume of benefits that replace risks, in order to avoid their accumulation in banks

The Central Bank is clearly afraid of the state’s passion for unstructured “development support” from 2023, which may include banks. Thus, the Bank of Russia insists that priority-strategic investment projects should be financed primarily by the budget, state guarantees are needed for loans, and the use of direct investments from state development institutions is a priority. With regard to the latter, the Central Bank proposes to finally move away from “pointed” budgetary additional capitalization to automatic. As for supporting companies when entering the capital market, here the Bank of Russia insists that it is necessary to move from “closed lists” (usually approved by the government) to open lists using “criteria for companies contributing to the transformation of the Russian economy.” With state support from technology companies, the Central Bank is taking the initiative to develop (with its participation) a “taxonomy (criteria) of projects for technological sovereignty and economic modernization” and is ready to harmonize its regulatory measures with these criteria.

Finally, the Central Bank insists on the need to “optimize and facilitate” the AML/CFT system and financial control.

Together with Rosfinmonitoring, the Central Bank undertakes to work out a reduction in the set of documents when working with clients of financial organizations, moving away from the requirement for the personal presence of clients and expanding video identification, as well as the issue of creating a single state resource with relevant customer identification data with online access to it by financial organizations. The Central Bank sees many irrelevant elements in the current AML/CFT system. In general, this is in good agreement with the general unspoken principle of the Bank of Russia in all parts of the document: the most liberal approach wherever possible, and an aggressive, sometimes excessive, position where it is for some reason, often beyond the control of the Central Bank, liberalism does not have the right to contain.

Dmitry Butrin