“The policy of the head of the Central Bank of the Russian Federation, Elvira Nabiullina, to curb inflation threatens the bankruptcy of large companies controlled by the Kremlin. There is only one alternative – the fall in the value of the ruble.”, — write: www.epravda.com.ua
Almost three years after the start of Russia’s full-scale invasion of Ukraine, Western financial sanctions have finally begun to take hold, provoking a bitter struggle within the Kremlin for control of the Russian Central Bank.
The Russian business community remained silent, even with Western sanctions provoked sharp rise in real interest rates. However, in recent weeks, the heads of large companies have begun criticize openly head of the Central Bank of the Russian Federation, Elvira Nabiullina, who has held her position since 2013 and, as reported, wanted to resign at the beginning of the great war in 2022.
Although Nabiullina’s position looks increasingly shaky, the Kremlin continues to insist on the fact that Western sanctions only strengthened the economy, making it more self-sufficient. This statement is clearly untrue, as evidenced by the repeated appeals of Russian officials to the West remove restrictions.
The increase in rates had the opposite effectSince the annexation of Crimea in 2014, economic sanctions have provoked three major currency crises in the Russian Federation: in March-April of 2014February-March in 2022 and July-August in 2023. Each time, Nabiullini managed to contain their consequences, each time raising interest rates.
However, the situation has changed. On October 25, the Bank of Russia increased the discount rate from 19% to 21%. In his statement The Central Bank of the Russian Federation notedthat “inflationary expectations continue to rise” and that growth in domestic demand is “significantly outpacing” the economy’s ability to expand the supply of goods and services.
In the same statement, it is noted that the increase in government spending and the growth of the budget deficit have a “pro-inflationary effect”, which requires further tightening of monetary policy.
With official inflation at 9% and a real interest rate of 12%, in Russia for the first time in a long time the debate about economic policy is unfolding. However, this time they are no longer dominated by the voices of real economists, as most independent experts have fled the country to avoid imprisonment.
What about the Russian economy?Instead, three prominent Russian oligarchs recently spoke out against the Bank of Russia’s interest rate hike. And if Oleg Deripaska’s frank criticism was hardly surprising, then Alexei Mordashov, who owns the Severstal metallurgical conglomerate, usually chooses his words carefully. Both Deripaska and Mordashov have broad support among the Russian business elite.
At the end of October, Mordashov admitted that “the need to raise rates to limit inflation is obvious,” but warned: “We are approaching a situation where the medicine may become more dangerous than the disease.”
However, the real shock came when Sergey Chemezov, CEO of the state giant in the field of arms and technology, Rostec, during a speech in the Federation Council (the upper legislative chamber) scolded Nabiulliniithat a repeated increase in rates will lead to the bankruptcy of most enterprises.
He also warned that higher interest rates could force Rostec to stop exporting high-tech products.
Several other prominent businessmen have expressed similar concerns – for the first time since the beginning of Russia’s great war against Ukraine. Thus, Vladimir Putin faced open opposition to his economic policy.
New influential peopleSince 2004, Putin and his entourage have amassed fortunes by manipulating government contracts and systematically embezzling the assets of energy giant Gazprom. At one time, this was documented by the now deceased Boris Nemtsov and Volodymyr Milov in their brochure “Putin and Gazprom“, published in 2008.
However, European sanctions turned Gazprom’s once huge profits into no less large-scale ones lossesreducing the financial influence of Putin’s longtime allies – “Gazprom parasites”, including Mykhailo and Yury Kovalchuk and Gennady Timchenko.
As Milov recently claimed, Chemezov has become a dominant figure among Putin’s business allies. Although he has few qualifications other than his past service in the KGB with Putin in Dresden, he has used these relationships to secure control of Russia’s defense industry, which is now consolidated within Rostec.
Russia has legalized cryptocurrencies. Will it help circumvent Western sanctions?The latter, supported by federal funding (although its finances remain a state secret), controls approximately 80% of Russian defense production.
Chemezov is also the main beneficiary of the war in Ukraine. Recent personnel reshuffles in the government – in particular, the dismissal of the Minister of Defense of the Russian Federation Sergei Shoigu – played in Chemezov’s favor, since Shoigu no longer dares to complain about the poor quality of Rostec products.
Meanwhile, Chemezov’s main protégé, Denys Manturov, was promoted to the post of First Deputy Prime Minister. Both Manturov and Oleksii Dyumin – another Chemezov ally – now hold seats on the influential Security Council.
Replacement of NabiullinaIn 2013, a fierce battle broke out in Putin’s inner circle over who would head the Central Bank – a liberal or a statist.
The main contenders at that time were Oleksiy Kudrin, a liberal ex-minister of finance, and Serhiy Glazyev, a supporter of a tight monetary policy. As Putin’s economic adviser, Nabiullina led the liberals to victory. This was facilitated by the Kremlin ruler’s fear of a repeat of the financial crisis of 1998, which led to the fall of the government of Prime Minister Serhii Kyriyenko.
Nabiullina’s current priorities are to control inflation, reduce capital outflow, stabilize the ruble and support GDP growth. However, the economy will continue to grow sluggishly: according to forecasts, the growth rate will decrease to 0.5-1.5% in 2025, compared to the expected 3.6% this year.
However, having failed to curb inflation, Nabiullina will most likely be dismissed.
Her trusted first deputy – Ksenia Yudayeva – was demoted in 2023 and transferred to the International Monetary Fund. At the recent BRICS summit in Kazan, Putin even made a cruel joke about Nabiullina, which clearly upset her.
The big question now is whether Putin will replace Nabiullina with a staunch loyalist who will lower interest rates, allow inflation to skyrocket, lead to capital flight and send the ruble into a “knockout.”
Given that the economic crisis in Russia is a direct consequence of Putin’s invasion and further Western sanctions, the only way to stabilize the Russian economy is to end the war and withdraw troops from Ukraine.
Anders Oslund – Swedish-American economist and diplomat, international expert on the national economies of Ukraine, Russia and the countries of the former USSR. Professor at Georgetown University, senior researcher at the Eurasia Center of the Atlantic Council, senior researcher at the Peterson Institute.
Copyright: Project Syndicate, 2024. www.project-syndicate.org