Battle over Russian central bank heats up

Nearly three years after Russia’s invasion of Ukraine, Western financial sanctions are beginning to take effect, sparking intense infighting in the Kremlin over control of the Russian central bank.

Over the past two years, the Russian business community had remained silent, even as Western sanctions sparked a increase of the real interest rate. But in recent weeks, various business leaders they heard criticism to the governor of the central bank Elvira Nabiúlina, who has held the position since 2013, and apparently tried to resign at the start of the war in 2022.

Although Nabiúlina’s position seems increasingly precarious, the Kremlin insist in which sanctions have only strengthened the economy, making it more self-sufficient. It is an obvious falsehood, as demonstrated by the repeated orders of Russian officials for the West to lift restrictions. In fact, since the Russian annexation of Crimea in 2014, economic sanctions caused three major currency crises: in March-April 2014, February-March 2022 and July-August 2023. On each occasion, Nabiúlina achievement contain the effects by increasing interest rates.

But now the situation is different. On October 25, with the argument of containing inflation, the central bank raised the reference interest rate from 19% to 21%. In your statementthe bank noted that “inflation expectations continue to rise” and that the growth of domestic demand “significantly exceeds” the economy’s ability to expand the supply of goods and services. The statement added that rising public spending and growing budget deficits have “pro-inflationary effects” that call for further monetary tightening.

With a official inflation of 9% and a real interest rate of 12%a long-suspended debate on Russia’s economic policy has been revived. But the dominant voices are no longer economists, because most independent experts fled the country to avoid prison. Instead, three prominent oligarchs have recently spoken out against the central bank’s interest rate increases. The usually loquacious Oleg Deripaska did not surprise anyone with his reviewsbut Alexei Mordashov (owner of the Severstal steel conglomerate) is usually very cautious in his words. At the end of October recognized the obvious “need to increase rates to limit inflation,” but warned: “We are reaching a situation where the remedy may be more dangerous than the disease.”

Deripaska and Mordashov have broad support from the Russian business elite. But the real surprise was when Sergei Chemezov, CEO of the state arms and technology mega company Rostec, criticized Nabiulina in a speech before the Federation Council (the upper house of the Russian congress), saying that the succession of rate hikes will drive most companies into bankruptcy.

Chemezov too warned that high interest rates may force Rostec to stop the export of high-tech products. Other important businessmen have expressed concerns similar, and it is the first time since the start of the war against Ukraine that President Vladimir Putin faces open opposition to his economic policies.

Since 2004, Putin and his cronies have amassed fortunes through rigged public contracts and the systematic looting of the assets of the mega energy company Gazprom, as the late Boris Nemtsov and Vladimir Milov show in a 2008 article titled Putin and Gazprom. But European sanctions have turned Gazprom’s once huge profits into huge losses, diminishing the financial power of Putin’s old allies, the “Gazprom parasites,” including Mikhail and Yuri Kovalchuk and Gennady Timchenko.

As recently held Milov, Chemezov has become Putin’s main business ally. Despite his few qualifications outside of having served in the KGB together with Putin in Dresden, he knew how to take advantage of that relationship to obtain control of the Russian arms industry, now consolidated in the Rostec company, which is supported by federal funds (although its finances are a state secret) and manages approximately 80% of Russian military production.

Chemezov also benefits greatly from the war in Ukraine, and has benefited from recent changes in the government (especially the dismissal of Defense Minister Sergei Shoigu, who no longer dares to protest the poor quality of Rostec products). Meanwhile, Chemezov’s main protégé, Denis Manturov, was promoted to first deputy prime minister. Both Manturov and Alexei Diumin, another Chemezov ally, now hold positions on the powerful Security Council.

I met Nabiúlina in the nineties, when she was a prestigious member of the Russian liberal camp. In 2013, a fierce fight broke out in Putin’s inner circle over whether to appoint a liberal or a statist to head the central bank. The main contenders were the former Liberal finance minister Alexei Kudrin and the statist hawk Sergei Gláziev. As Putin’s economic adviser at the time, Nabiúlina led the liberals to victory, helped by Putin’s lingering fear of a repeat of the 1998 financial collapse that brought down Prime Minister Sergei Kiriyenko’s government.

Nabiúlina’s current priorities appear to be controlling inflation, reducing capital flight, stabilizing the ruble and sustaining GDP growth, which according to projections will fall to 0.5-1.5% in 2025, from 3.6% expected for this year. But by not stopping inflation, his dismissal is most likely. His right-hand woman, Ksenia Yudayeva, was demoted in 2023 and reassigned to the International Monetary Fund. At the recent BRICS summit in Kazan, Putin even made a cruel joke at Nabiúlina’s expense, which left her visibly dismayed.

The question now is whether Putin will remove Nabiúlina and put in her place a loyal but unskilled person who will reduce interest rates, allow inflation and capital outflows to rise, and cause a collapse of the ruble. Since the Russian economic crisis is a direct consequence of Putin’s invasion and subsequent Western sanctions, the only way Russia’s only way to stabilize its economy is to end the war and withdraw its forces from Ukraine.

Copyright: Project Syndicate, 2024.
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