The Kremlin raises pressure on the central bank over the devaluation of the ruble

It saved the Kremlin from economic collapse at the beginning of the invasion, but a year later it has been accused by the government itself of making its currency the laughingstock of the world. The Central Bank of Russia raised the rates from 8.5% to 12% on Tuesday in an extraordinary meeting called after its currency devalued to the psychological 100 rubles per dollar, a more political than technical scale, and logical within what planned by the institution weeks before. Although the weakness of the Russian currency has eased slightly since then, the performance of the organization headed by Elvira Nabiúllina has raised doubts about its independence for the challenges ahead. In the background, a presidential election for which there is little more than half a year left and a war economy where the hole grows as the invasion of Ukraine stalls.

On Monday the 14th, at noon, the central bank was firm in a statement sent to the Russian agency Tass: “there is no threat to financial stability.” And in the middle of the afternoon he announced a surprise meeting in which his rate hike beat all the forecasts. After his intervention, the Russian currency strengthened slightly and closed this Friday at 93.7 rubles per dollar, a level close to that of early August. The same week that two important members of the central bank resigned by surprise and the government announced that it would henceforth break its own fiscal rule: buy foreign currency with the extra income from the export of hydrocarbons.

Precisely the pressure from the Kremlin on Nabiúllina and his team had intensified in the last two weeks. “They are laughing at us outside, that our ruble is one of the three weakest currencies!” Vladimir Solovyov, one of Putin’s star propaganda presenters, shouted on August 10. “” Thanks to the geniuses of the Central Bank, who despises people so much that they don’t say a single word about what they are doing! ”, He added.

The governor of the Russian central bank, Elvira Nabiullina, at an event in St. Petersburg. ANTON VAGANOV (REUTERS)

On Monday, when the Russian currency crossed the symbolic mark of 100 rubles per dollar, it was the Kremlin itself that openly charged against the monetary body. His top economic adviser, Maxim Oreshkin, published a rare column in the state news agency TASS on Monday accusing the central bank of depreciation for allegedly encouraging lending. “The main source of the depreciation of the ruble and the acceleration of inflation has been loose monetary policy. The Central Bank has all the necessary tools to normalize the situation, ”he stated.

However, the monetary body pointed until Monday to a completely different cause of the devaluation of the ruble: “A significant reduction in exports and an expansion of imports associated with active growth in domestic demand, even in the context of high rates on loans, while maintaining high government demand.

Oreshkin also reiterated in his column another criticism that he had already leveled against Nabiúllina during an event at the St. Petersburg Economic Forum in June. According to the Kremlin adviser, the main threat now is a consumer lending bubble, with rates of 30% per year versus 5% that theoretically raise wages. Nabiúllina then replied that Russian banks have a sufficient cushion, household debt barely represents 14% of GDP and that citizens have no other alternative to maintain their standard of living.

Political and non-monetary criteria

The macroeconomic analysis center of Alfa Bank, one of the most important financial institutions in Russia, has been very harsh with the advice of the central bank by letting it fall that it has given in with its rate hike to the political needs of the Kremlin.

“As Russia prepares the 2024 budget, we fear that the unexpected decision of the central bank may be related to this,” warns Alfa Bank. “It is quite possible that the Russian Federation will face a significant increase in social spending on the eve of March 2024 – the date of the next presidential elections – and, in this case, inflation rates in 2023 will be very important as a base to index spending in budgets”, says the bank.

Alfa Bank insinuates that the celebration of that emergency meeting did not start from the monetary body itself. “We are disappointed that the communiqué has not explained the need to hold an extraordinary meeting. All the factors that you mention were already known on July 21, the date of the last meeting on the rate”, criticized the bank.

The analysis center highlights that the Nabiúllina council “established in July a rate of 10% as the maximum range for 2023” and the sudden rise to 12% “is significantly higher than the forecast published only three weeks ago.” According to Alfa Bank, there were no reasons for this twist in the script because inflation barely rose one hundredth of a percent at the beginning of August and the depreciation of the ruble was expected for two main reasons: “the low liquidity of the summer” and a new cut in exports Russian oil company agreed with OPEC+, a measure that is “temporary and manageable”.

“The only adequate explanation, in our opinion, may lie in some details of the draft budget for next year that are not yet available to the market, but that the Central Bank of Russia knows about,” Alfa Bank emphasizes, very critical “of the unpredictability” of the monetary body and its collusion with the Kremlin.

The consensus of Russian experts supports the explanation of the devaluation of the central bank against that of the Kremlin. In other words, a combination of more imports with a collapse in exports and capital flight due to the war, and not due to an expansive monetary policy. Alfa Bank chief economist Natarlia Orlova stressed last week that the trade balance was negative in June for the first time since 2020 and that Russia’s partners prefer to pay massively with their ruble reserves and not in other currencies.

Alexander Potavin, an analyst at Finam, points out that smuggled imports cannot be paid for in yuan and rubles, which drives demand for dollars and euros. The investment firm Loko-Invest, for its part, also stressed on Monday that the devaluation of the Russian currency will not be resolved by a rate hike, but by a change in the geopolitical landscape.

In addition, the devaluation leads many companies to resort to bank loans to meet current expenses with rubles, instead of using their foreign currency reserves.

The Russian central bank has less and less room for manoeuvre. Half of its reserves to moderate the market, more than 300,000 million euros, have been frozen by the West, and the Russian government has flooded the economy with rubles while heating up imports for its war industry.

The invasion of Ukraine has sent Russian military spending skyrocketing to more than a third of budgets, according to documents seen by Reuters. The news agency reveals that Moscow has doubled its forecast for this year in spending on the armed forces above 90,000 million euros, since the 4.98 trillion rubles (48,603 million euros) originally estimated were widely exceeded in the first semester.

Added to the voracity of the war machine and the generous payments to convince the soldiers is an economy that is increasingly subsidized by the crisis. The latest proposal in this regard came last week from the Education Committee of the State Duma. The lower house of the Russian parliament is considering “a single debt amnesty” – between 5,000 and 10,000 euros – for families with children in certain circumstances.

The Government promises to maintain the deficit in its 2023 forecast. In any case, the real situation of the Russian economy is only known within the Kremlin walls. A large part of government budgets are confidential and parliament has passed a law to declare foreign financial analysts and consulting firms that check the russian accounts.

The Kremlin threatens companies

Days after the extraordinary meeting of the governing council of the central bank, President Vladimir Putin summoned Nabiúllina to another meeting together with Oreshkin and the ministers of Finance, Anton Siluanov, and of Economic Development, Maxim Reshétnikov.

According to various sources in the Vedomosti newspaper, it was decided not to impose more restrictions than currently exist on the movement of capital or force exporting companies to sell the euros and dollars that enter, as was done at the start of the war, although the Kremlin threatened with which this measure will be inevitable if the situation does not improve. According to the Russian newspaper, Putin especially targeted Russian fertilizer multinationals.

On the other hand, the weakness of the ruble has made Putin quietly renounce one of his flagship measures against the West. The president has once again allowed the oil company Rosneft to sell its products in foreign currency directly and not under the complicated scheme that he devised so that “hostile countries” were forced to pay in rubles, as also happened with gas.

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