Yesterday, President Vladimir Putin held an enlarged government meeting devoted to long-term development plans up to 2018. Putin said that rising interest rates are worrisome and impede economic growth. He also suggested the abolition of the deadline for households to decide whether to leave the 4% part of social tax in the funded or pay-as-you go pillar of the pension system, if the authorities (i) protect against the loss of accumulated pension money in the long term and (ii) can properly regulate private pension funds (with the CBR proposed for the task).
Other key points:
Medvedev: GDP target is 5% YoY for five years; Russia’s population to follow upward trend and expand to 145mn by 2025.
Ignatiev: With new fiscal rule, CPI might slow to 4% or below; interest rates will also decline with lag.
Putin’s comments on interest rates confirm the growing pressure on the CBR to start easing monetary policy. This supports our expectation of a 75bp cut in base rates this year. As we have highlighted , there is a risk of an excessively dovish policy mix in 2H13 – especially accounting for the fact the official estimates for shortterm potential growth are overvalued, in our view. Ignatiev also said that the proper tightness of fiscal and monetary policy would push inflation and later nominal rates lower. The recent slowdown of inflation is a success of the prudent stances of the Ministry of Finance and CBR, which is why positive dynamics from now onward depend a lot on the new CBR governor (to be proposed by Putin by March, 24th).
The proposal to allow households to choose whether to direct the 4% part of social tax to the funded or pay-as-you go pillar part of the pension system supports our view that there are opportunities for the shift in the pension system to be soft. We believe that the success of using pension fund money for investment in infrastructure projects and privatisation deals might encourage the authorities to keep the funded part of the pension system intact.