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President of Russia Vladimir Putin: Good afternoon, colleagues,

We are here to discuss the situation on the financial and currency markets, but before turning to that question, I would like to hear some updates on a couple of matters.

I know that the Prime Minister has already instructed the Finance Ministry to coordinate with our partners in Ukraine on possible provision of additional aid, as well as assistance for some Ukrainian regions that have come to us with such requests. What is the situation now? Could you update us?

Finance Minister Anton Siluanov: Mr President, overall, Ukraine is indeed facing a difficult situation. Budget spending is falling. Estimates show that only around 15 percent of planned budget spending is actually taking place at the moment. 

Naturally, this affects the regions, including Crimea, and so we have organised cooperation now between our Finance Ministry and the Crimean Finance Ministry.

Vladimir Putin: First, I wanted to hear about Ukraine as a whole.

Anton Siluanov: What we are looking at for Ukraine as a whole is falling revenue, which will result in budget spending being revised downward by 15 percent. 

In response, our foreign partners are offering aid, primarily through the International Monetary Fund. The United States and the European Union countries have also said they could provide support, and we think that we too should examine the various possibilities for providing assistance if the general situation worsens.

Vladimir Putin: Regarding the regions, do you propose that we work at regional level, work through the Russian regions?

Anton Siluanov: I know that Russian regions on the border with Ukraine have put forward proposals for financial aid, seeing as they have already concluded the relevant agreements with their neighbours on mutual cooperation and provision of financial support. These agreements could be implemented now. 

Vladimir Putin: Good, thank you.

Mr Miller, you already briefed [Prime Minister] Mr Medvedev on the situation on the Ukrainian energy market. I am aware of the situation and know the details in principle. Has there been any change of late?

Gazprom CEO Alexei Miller: Mr President, of a total debt of $1.529 billion, Ukraine has paid off $10 million to date, but on March 7, the day after tomorrow, Ukraine’s debt commitments will increase by another $440 million in payments for February gas supplies.

Vladimir Putin: Are they going to pay?

Alexei Miller: Our Ukrainian colleagues have informed us that they cannot pay in full for the gas supplies in February.

Vladimir Putin: So what will this bring their total debt to?

Alexei Miller: It will increase it substantially, bringing it up to around $2 billion.

Vladimir Putin: I see. Keep the Prime Minister updated on developments in the situation.

Yes, go ahead.

Deputy Prime Minister Dmitry Rogozin: Mr President, I just want to add a couple of words on the electricity issue. You know that there are 15 nuclear power plant units currently in operation in Ukraine, as well as the four sealed units at the Chernobyl NPP. 

This matter concerns us of course because the reactors are Russian-built. The plants are operating normally and everything is ok there, but external security at the facilities is the responsibility of private security firms and troops from Ukraine’s Interior Ministry and Security Service.

There is also the issue of transit of nuclear fuel via Ukrainian territory to our partners in Eastern Europe, and the issue of fuel supplies for the nuclear power plants in Ukraine itself.

Ukraine’s power stations have enough fuel reserves to get them through March and April, but that is it. A ban on fuel transit through Ukrainian territory is in place at the moment because of the unstable situation in the country. 

We plan to go through [State Atomic Energy Corporation] Rosatom to request that the IAEA conducts an additional inspection of external security at Ukraine’s nuclear power plants.

Vladimir Putin: I have a request to you and your colleagues working in energy and finance. We are aware of the tense political situation, but it should not affect our on-going economic cooperation. We should not add difficulties to an already complicated situation. We need to keep working with all of our established partners. Of course we need to look after our interests too. No one ever gets anything for free, and this is still the rule today. But we should not exacerbate the situation and should not let our economic cooperation become hostage to the political situation.

Let’s turn to the issue we have gathered here to discuss; let’s ask Ms Nabiullina to describe the current situation in the stock and currency markets.

Please, go ahead.

Governor of The Bank of Russia Elvira Nabiullina: Thank you.

Mr President, colleagues,

The situation on the foreign exchange market has been more tense since the beginning of the year; however, the reasons for this have changed over time.

In January, the main factor was the investors’ reducing their holdings in emerging market nations, caused first and foremost by the actions of the US monetary authorities, the US Federal Reserve and the overall slowdown of the growth rates in these nations’ economies.

A splash of volatility occurred in many of these nations, but overall, the situation was relatively stable. Russia would most likely have had a similar scenario, but unfortunately, the well-known political factor got in the way. Investors reacted quite sharply to the increase in political tension in Ukraine. The peak was on Monday. That morning, the Central Bank made two decisions aimed at creating conditions to stabilise the situation in the financial markets.

First of all, the Central Bank raised the key rate used for providing the bulk of liquidity to banks, by 1.5 points, to the annual total of 7%.

Second, we decided to set our currency market intervention parameters daily, based on the current situation. On Monday, we increased the amount of accumulated interventions. We have a rule, and we changed the parameters of that rule, increasing the amount of accumulated investments necessary for shifting the corridor of our bi-currency basket more than four-fold, to $1.5 billion.

Overall, on Monday, we sold just over $11 billion. In our view, this helped curb the panic and support the stability of the ruble. By evening, the situation on the foreign exchange market was getting back to normal, and at the end of the day, overall, the ruble lost about 1% against the basket of main currencies.

On Tuesday, we sold much less. We reduced the sales volume to $300 million, and the ruble exchange rate rebounded almost completely after Monday’s drop. In addition, another factor that affected the stabilisation of the situation was the Finance Ministry’s decision to halt the buying of foreign currencies for the Reserve Fund due to the increased financial market volatility.

The stock market experienced a significant drop in quotes on Monday – about 11%. The next day, the quotes also went up, regaining nearly half of the drop. However, the Russian stock market is not large enough and is more subject to fluctuations, and today we are seeing a slight decrease. Nevertheless, the Central Bank does not see any fundamental reasons for the ruble’s devaluation.

Right now, the pressure that the ruble experiences is caused by external factors. The current Central Bank assessments show an undervaluation of Russia’s currency, first and foremost given the current external balance.

The initial data – they are still preliminary – on the trade balance show that in January and February of this year, it was better than over the same period last year. The favourable current external balance has grown, according to our data, by 14% — from $17.3 to $19.7 billion. And the trade surplus grew by 11% from $32.5 to $36.3 billion. It seems the effect of the ruble’s depreciation in recent weeks had its impact.

However, the only factor for the ruble’s long-term sustainable strengthening is the positive dynamics in Russia’s key economic indicators, including higher economic growth rates, increased investment volumes, and lower capital flight.

Concerns have been expressed about how the depreciation of the ruble will influence inflation. According to our assessment, taking into account the measures taken, we can achieve our set goal of getting inflation down to 5% by the end of the year, although overall, for now, inflation remains elevated. In January, it stood at the annual rate of 6.1% and in February, it was 6.2%. The accumulated inflation since the beginning of the year, in the last two months, stood at 1.3%.

At the same time, I want to particularly stress that our decision on changing the level of our involvement in the currency market, which occurred on Monday, does not change our fundamental decision to make a shift to the inflation targeting regime. We will continue to increase exchange rate flexibility.

But, as stated earlier, in order to maintain financial stability – and that is our goal and responsibility – we will engage in the necessary volume of currency interventions, if needed. That is the approach we have implemented over the last days.

The Central Bank views the decision to increase key rates by 1.5% as temporary, since it entails certain costs, including its influence on the economic growth. We will monitor the development of the situation, and implement a corresponding monetary policy based on that situation. The Central Bank has a full range of instruments and sufficient international reserves to ensure stability on the financial market.

Vladimir Putin: Thank you.

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