The merger of the Bank of Russia and the Federal Financial Markets Service may not have such a positive effect on the financial system as experts say. At the same time, the idea to transfer to the Central Bank the powers to protect the rights of financial services consumers is reasonable. Such a thought was mentioned in an interview with NBJ by Alexander MURYCHEV, the first executive vice-president of the Russian Union of Industrialists and Entrepreneurs.

2013, ACCORDING TO IMF FORECASTS, WILL BE LESS SUCCESSFUL FOR THE WORLD ECONOMY

NBJ: Alexander Vasilyevich, the first question that I would like to ask you: in your opinion what stage the global economy is going through now? Is it appropriate to talk about the current situation as a crisis? Or is it the post-crisis period? Or is it the beginning of the second wave of the crisis?

A. MURYCHEV: The current situation in the global markets is very alarming, and, unfortunately, despite various optimistic projections, the tendencies for its stabilization are not traced. 2012 was relatively successful, as the financial authorities of European countries have taken a number of measures aimed at monetary policy softening and fiscal consolidation. Such measures enabled Europe, the U.S.A. and Japan to avoid the risk of further economic spiral decline and restored global GDP growth rates, which, however, are small and depend mainly on the Chinese economy. These rates make about 3.2%.

The year 2013, in my opinion, will be less successful for the global economy. Unfortunately, we may not expect that the growth rate will remain at the same level as in 2012.

NBJ: Probably it may be explained by the absence of locomotive which would pull the global economy.

A. MURYCHEV: Today, perhaps, only China may claim for such a role. The U.S.A. economy is doing well, but its key issue cannot be solved by financial authorities. This issue is the country's national debt which is huge, it has exceeded all permissible limits, including that maximum amount, which was approved by the U.S. Congress. Of course, there is a positive aspect: the most part of U.S. banking sector is additionally strongly financed from the budget and from the Federal Reserve System funds. It allows to increase the total loan portfolio, revive the economy of the country by lending.

NBJ: Europe really solves this issue by other way. The budget injections into the banking sector are not honored here.

A. MURYCHEV: Yes, the U.S.A. and Europe in this matter really go separate ways. But Russia is at a crossroads today: the country decides what a better option for development is: economic stimulation through massive state injections or the introduction of austerity providing for budget cuts, including the cuts in the social sphere.

NBJ: Your comment makes me ask the following reasonable question: why doesn't Europe follow the American way? Can't Europe afford it or doesn't it want to follow such a way of development?

A. MURYCHEV: I think the country acts consciously and European financial authorities really consider their chosen path as the right and effective one. But for now we have to state that Europe fails to solve the existing problems only through budget cuts. Moreover, there arise new problems of social nature due to the sharp budget cuts in European countries. For example, it is no secret that the proportion of the unemployed in Europe is increasing drastically. As a whole this figure has reached 11.7% according to the results of 2012. In southern Europe the numbers are appalling: in Spain and Greece, the unemployment among young people at the age of 17-25 years has reached 50%. Clearly, this entails the radicalization of the society. Is it any wonder that radical atmosphere starts to dominate in a number of European countries?

Summarizing all mentioned above, I want to point out that Europe has come, in my opinion, to a historical dead end. In fact, today, it has only one locomotive - Germany. But it remains unclear how long Germany will fulfill this role.

NBJ: In your opinion, can the escalation of the problems you listed - economic, budgetary and social - result in a certain time perspective to the break-up of the European Union?

A. MURYCHEV: It's hard to say. If recently such a question would be followed with a negative answer, the story of Cyprus changed the situation greatly. After all, in fact, in this case the European authorities acted in a raider way by taking away private property in order to solve the debt problems of the country. We should understand that these actions are clearly short-term. In the long run Cyprus and the European Union will suffer from "deposit cuts" Cyprus will suffer, because it is in investment isolation, and the European Union will suffer, because the whole story greatly undermined its credibility in the eyes of investors and in the eyes of other member states of the EU.

What's next - we'll see. Today we can say that Cyprus is not the only EU country which suffered because of unresolved debt problems. The budget deficit continues to grow in Spain, it is now more than 10.2%, while the public debt of the country is close to 96% of GDP. Italy, to which less attention is still paid than to Greece, Spain or Cyprus, faces grim prospects for debt service. And its public debt in respect to GDP ratio has already reached two trillion euros! This is an excessive burden for the country, not only in terms of debt repayment, but also in terms of interest payments.

NBJ: Now after the "Cyprus story", is there a reason to believe that the debt problems of Spain, Italy or any other European Union countries can be solved according to the Cyprus scenario? "Cut off" deposits and sleep well?

A. MURYCHEV: It is theoretically possible, but practically... I think that the European authorities would not risk repeating the Cyprus precedent for these countries. With all this Cyprus is a small country. Yes, it had a significant financial sector if compare its volume with the volume of the country's economy. But by the standards of other countries, there is nothing special in it. Only some of deposits suffered in Cyprus due to their "cut-off". And there is no point to hide the fact that the most of the cut­off deposits presented the so-called Russian deposits. In Spain, Italy or any other EU country the use of such a mechanism depriving of private property may lead to disastrous results, including the social and political ones. If it happens, the collapse of the European Union may be a quite realistic scenario.

"RUSSIA HAS NEITHER THE EXPERIENCE NOR THE PRACTICE OF COORDINATING THE ACTIVITIES OF FINANCIAL AUTHORITIES"

NBJ: Taking into account the facts that you have mentioned the American way of overcoming the crisis consequences seems to be more acceptable.

A. MURYCHEV: Anyway, it is more effective. As I said, the United States made a huge infusion of public funds into the banking sector, which allows credit institutions to keep afloat. Note that U.S. financial authorities do not urge members of the national banking market to Basel III transition in contrast to the European financial authorities. Not a long time ago I had a chance to talk with a representative of the Federal Reserve System. He responded to my question about Basel III and explained that the U.S. made a decision not to rush the introduction of this standard. The issue of transition to this standard is taken under the control of the U.S. Congress. The general opinion of American legislators and the heads of supervisory and regulatory USA agencies is this: until there is a long-term sustainable growth of the economy, until the financial system reaches stability, the transition to Basel III won't be accepted. As you can see, this is a political decision.

Russia is at a crossroads today: the country decides what a better option for development is: economic stimulation through massive state injections or the introduction of austerity providing for budget cuts, including the cuts in the social sphere.

NBJ: And in this case, Russia takes the Europe way.

A. MURYCHEV: Unfortunately, yes. We adopt the European model also in other issues. For example, you are well aware that now there's a debate about whether or not to impose theresponsibility for economic growth rate on the Central Bank. In a number of European countries there is such a practice, but does that mean that we necessarily need to do the same? Personally, I am not a supporter of such a decision. First of all it's because the Central Bank already has certain issues to solve, for example, the expansion of bank refinancing tools, the extension of refinancing terms and, of course, the improving of market participants' activity control. Secondly, because the responsibility for the ensuring and rate of the economic growth, in my opinion, should be borne by the Government. If this duty is shifted to the Central Bank, then the Bank of Russia is actually assigned as guilty in case of failure. And it turns out that the government will be innocent.

NBJ: You do not agree that the Central Bank should bear the responsibility for economic growth. What about the other proposal: to turn the Central Bank into the megaregulator of the financial market? After all, it is also a fairly controversial idea.

A. MURYCHEV: The idea may be controversial, but there is no point to argue about, because the decision has already been taken. I believe that megaregulation needs to be launched, but it does not mean that we should speak of the immediate creation of a megaregulator. We must understand that Russia has neither the experience nor the practice of coordinating the actions of the financial authorities. Ten years ago, I proposed the creation of a coordinating council to regulate the financial market and supervise it, to develop uniform assessments, monitoring system, etc. I was not heard then, but now the idea to create a megaregulator has arisen very quickly, ignoring the contradictions that exist in the law, that is the lack of experience in the coordination of joint actions which I have already mentioned. Finally, we should not ignore the traditions that are unique for each regulating authority. We have FFMS and the Central Bank. Federal Financial Markets Service employees will be transferred to the site of the Central Bank and given the same salary as their counterparts in the Central Bank have. What will be changed, except for their place of employment and the size of their salaries? I fear that the rush of a megaregulator creation will not help the financial sector but will damage it.

NBJ: The Federal Financial Markets Service got accustomed to the fact that the Service will become the Central Bank department. But the other day there was the news that the Central Bank may be delegated with the functions of rights and interests protection of financial services consumers. Do you think it's a good proposal that will not give rise to a conflict of interest?

A. MURYCHEV: I agree with the proposal and do not see any reason for conflict. The fears that the Central Bank will not actually protect the interests of customers but the interests of banks, in my view, are not reasonable. CB quite strictly regulates the activities of market participants, it got used to the fact that it punishes the guilty credit institutions. On the other hand, the Bank of Russia, of course, is better versed in financial disputes than Rospotrebnadzor (Federal service on customers' rights protection and human well-being surveillance). So I do not see anything tragic in the fact that the functions of financial services consumers' rights and interests protection will be delegated to the Central Bank, especially as there is an international practice, under which central banks of different countries practice such things.

CWE NEED TO PERFORM THE REDISTRIBU­TION OF MONEY TO THE INDUSTRIES, NOT CONNECTED WITH OIL EXTRACTION OR TREATMENTC

NBJ: Since we have moved to a discussion of possible future powers and functions of the Central Bank, let's talk about the economic prospects of Russia. At first glance, our country more or less easily copes with the deterioration of the situation at the world markets. Nevertheless, the fact that is recognized by all the experts is the decrease of GDP growth rate. Is this the response of our economics to the global economic crisis or is it the impact of its own problems?

A. MURYCHEV: I would like to begin my answer to your question with the following fact: the Russian economy is still viewed by the world as a fairly stable. In 2011 its growth rate was 4.3%, in 2012 it was 3.4%. In this case, there are indicators that support the confidence of experts in the stability of our economy. Russia has one of the lowest unemployment rates in the world: it is only 5.5%, whereas the figures for Europe were already mentioned by me, and you have seen that they are at least twice as large as our indicator. In Russia the inflation is quite adjustable - 6.6% in 2012, the reserves almost reached the precrisis level and make about 533 billion dollars (the situation of 01.05.2013). These are definitely positive aspects, as well as the stable political situation in the country.

On the other hand, a recession is evident during the last two quarters i.e. a decline of GDP growth and the output volumes in the basic sectors of the economy. If you talk about the last quarter -January - March 2013 - the corresponding figure makes here only 1.6%. This is the minimum value in the history of the Russian market, of course, with the exception of the late 1990s and the period of the years 2008-2009. These facts cannot be ignored. It is obvious that the problems in the economy are increasing, so it's not a surprise that the experts actively discuss them, as well as the ways and mechanisms of their overcoming.

Why is this happening? Of course, a definite role is played by the unfavorable foreign economic environment. Demand for raw materials is reduced, we observe the decrease of the world oil prices. If in the February of the current year, the price per barrel of Brent oil was $ 118, now it makes 100-105 dollars per barrel. Our economy, or its well-being if to be more exact, depends on the volumes of raw materials export and the world prices of raw materials. Unfortunately nothing has changed on this issue over the years. Therefore, if the downward trend in oil prices continues, the problems of the Russian economy will be felt more acutely.

NBJ: After that, they usually speak of the need for structural reforms in the economy.

A. MURYCHEV: They are right. In my opinion it is necessary to create a motivated non-oil market through the mechanisms of subsidies, preferential tax policy, etc. It is necessary to make sure that the money was redistributed in the industries that are not related to the oil extraction or treatment. Some steps in this direction are taken: now the government is making a bill for the State Duma on the development of the Far East. Under this bill it is proposed to reduce to zero the profits tax for investors who invest in the formation of the economy of the Far East till 2019, and set this tax at the rate of 10% since 2019 till 2024. This is a good initiative, but Russia consists not only from the Far East. It's a big mistake to think that the problems are resolved and things are fine in other regions.

NBJ: Experts say that our economy is suffering from a lack of credit resources, and perhaps this opinion is acceptable, if you look at the dynamics of growth in corporate lending during recent years.

A. MURYCHEV: You can go back to Basel III and the desire of our financial authorities to implement this standard on the principle of Ohe sooner, the better OWe must understand that the transition of banks to Basel III will inevitably lead to the reduction of crediting, because the requirements to capital, formation of the buffer capital, adequacy norms, redundancy and etc. will rise. I would like to ask the following question: is such a step logical in the situation where we have, as you rightly pointed out, a decrease in the rate of corporate lending growth? At the end of 2012, these rates have decreased by half compared to the same period in 2011.

NBJ: It is believed that the cause of such situation is very high interest rates on corporate loans.

A. MURYCHEV: In my opinion, this is not the main reason. As a determinant I would call a socalled sluggish growth in industrial production, and taking into account the results of the last quarter - a decline in the industrial production. Add to this the reduction in the number of "good" corporate borrowers and after that the rising cost of borrowings. The last factor has the following paradox: the lowering of the Central Bank refinancing rate does not lead to the lowering of interest rates on loans, no matter how confident our government is in the opposite. According to classical economic theory it should happen, but we have to admit that it is not so. The refinancing rate in Russia makes 8.25% and the rate on corporate loans makes 15-18%!

Of course, it is very good that there are programs of small and medium-sized businesses support, that there are development institutions, such as SME Bank. But let's be honest: SME resources are not enough to satisfy the demand for credit from small and medium-sized companies. The state's task is to provide additional capitalization of development institutions in order to strengthen SME funding, to isolate the small businesses that need to be supported and develop the mechanisms of subsidizing interest rates on loans. If we want to create a diversified economy, then we have no other choice but to support small businesses.

NBJ: Representatives of banks, discussing the issue of interest rates on corporate loans, say the following: Yes, the interest rates are high, but their dynamics are affected by the tightening of regulatory requirements - the new editions of Instruction No. 110-И, Regulations No. 254-П, and so on.

A. MURYCHEV: Yes, this factor also should be considered. The tightening of prudential reserve requirements has affected the amount of so-called technical loans. If earlier the financial and credit institutions gave them easily as they knew the borrowers in detail, the 100 percent reservation is now required under such loans. Of course, banks are not interested anymore in their provision.

NBJ: Do you mean burdened borrowers in this case?

A. MURYCHEV: Of course, and also other companies. There are also companies that cannot provide collateral or guarantees for loans, but the banks know exactly that these borrowers will faithfully serve such loans.

CB SHOULD MOTIVATE THE BANKS FOR THE BALANCE CLEARING

NBJ: In 2012, there was a significant increase in the consumer credit market, and the Central Bank actually spent the whole last year on the attempts to cool down the process. From your point of view, did the regulator in this matter act properly?

A. MURYCHEV: On the one hand, yes, as in the segment of unsecured loans the growth made 53%, respectively, the risks of lending banks have increased. But, as we state this fact, let's not forget about the reasons that led to the explosive growth of such loans share in bank portfolios. First of all, it is the revival of the population demand for various goods, the increase of such loans availability for potential borrowers, and even, strangely enough, the entry to the market of the organizations competing with banks.

NBJ: MFO?

A. MURYCHEV: Yes. In this context, banks, naturally, have to soften the requirements for borrowers and increase the volume of consumer loans.

There is another point that needs to be mentioned: since last year, along with the issuance of new loans there was the wave of old loans refinancing. This wave contributed to an increase in the volume and share of consumer loans in bank portfolios. Therefore, I must admit, there are indications that there is a [bubble Qvithin the market and that at a certain development of the situation, it may burst.

NBJ: May it happen even in spite of the efforts made by the Central Bank to prevent this?

A. MURYCHEV: And how can it prevent this? People go to the banks. Should they be refused in loan provision? Then, at some point, there comes a time of restructuring a significant proportion of outstanding loans: according to the Central Bank today about a quarter of large loans went through a restructuring. Almost half of this quarter is a heavy legacy of the last crisis.

NBJ: Are these the same bad loans, which were much talked about in 2009?

A. MURYCHEV: Of course. They were not gone from the bank balance sheets, they were simply prolonged, restructured, and their volume according to the Bank of Russia data made 1.6 trillion rubles by the end of 2012.

NBJ: Is it a time bomb?

A. MURYCHEV: Yes, it is. And more than 60% of such bombs are made of prolonged loans, and their volume over the past three years did not change. We are talking about a trillion rubles.

NBJ: Is there a way to neutralize the bomb before it explodes?

A. MURYCHEV: Central Bank should motivate banks to clear balances, if market participants do not realize the importance of the problem and are not doing this by themselves. Moreover, credit organizations are afraid to show the bad loans on the balance sheet, they are hiding them by restructuring or prolongation. I note that their European "colleagues" have in this matter quite a different strategy: almost all presented their "bad" loans for regulators. Of course, this has led to a reduction of their capital, but on the other hand, gave them the opportunity to receive state support. As for us, in spite of the experience - the crises of 1998-1999, and 2008-2009 - banks continue to hope for the best, but the problem of "bad debts" is solved only on a short term basis according to the principle "how to hide them today, so as not to suffer tomorrow".

NBJ: Finally, some questions about the passive base of banks. You talked about the fact that the expansion of banks funding instru­ments by the Central Bank and the extension of the funding term is also desirable.

A. MURYCHEV: We must pay tribute to the Central Bank: on the background of the crisis in 2008, it introduced a wide range of refinancing instruments. I believe that this list can be improved, and that it is possible to lengthen the funding terms. We should proceed with this matter evolutionary, no one urges to prolong the terms up to 3-5 years at once and begin to provide funds to all banks indiscriminately. This problem may be solved step by step, moreover, as I have said, the Central Bank has the experience in this matter.

NBJ: But mostly passive base of the banks is replenished by deposits of individuals and legal entities. And then I want to ask about your attitude to the Ministry of Finance proposal to levy an additional tax on citizens' deposits income in cases when deposit rates set by banks exceed the refinancing rate of the Central Bank by three percentage points.

A. MURYCHEV: Apparently then, this is made to cool the ardor of banks that make risky rates.

NBJ: It is not just this purpose. The government hopes that the people oriented for high return on investment, in case of the proposal fulfillment will start to pay more attention to other financial instruments, primarily to stocks.

A. MURYCHEV: I think this way is too complicated. If the bank makes risky interest rates on deposits, it is logical for it to increase the rate of contributions to a deposit insurance fund. Why should an additional tax on client's income be imposed? It is the bank that makes risky rates in this case, not a customer. Responsibility should be borne by lending institutions.

NBJ: Differentiated scale contributions to the DIS (Deposit Insurance System), of which you speak, still have not been introduced yet. I understand that there are disputes - to connect the amount of deductions to the interest rate on deposits or to the level of bank financial stability. Are you a supporter of the first proposal?

A. MURYCHEV: Yes, I am. In the first case we have a very specific routine mode. If the average rate on the market is 11%, and you, as a bank attract deposits at 13%, then be kind to insure your risks through additional contributions to the DIS. Such a criterion as a financial stability is vaguer, in any case, the regulations of this index definition are unclear nowadays.