I’ll confess to being genuinely incredulous at the financial media’s use of words like “resilient” to describe the Russian ruble, which this week managed to claw back the entirety of losses tied to Western sanctions.
Russian exporters are required, by autocratic decree, to sell 80% of incoming hard currency for rubles. Russia is operating under capital controls. Foreigners are trapped. They can’t sell Russian assets. And, so far anyway, Germany has refused to countenance a ban on Russian gas, which means one key source of revenue continues to flow to Moscow.
Self-sanctioning and proliferating bans on Russian commodities notwithstanding, Vladimir Putin is poised for a large windfall on energy exports in 2022 thanks in no small part to the fact that his own actions drove up the price for what he sells to the rest of the world.
Between all of that, possible incremental intervention using whatever reserves Elvira Nabiullina has left in Russia and what one has to imagine is a hopelessly thin market, it’s not obvious why anyone would bother commenting on where the ruble trades. “When talking about ruble stabilization it’s important to remember that it’s a combination of large current account inflows, capital controls and low market liquidity,” IIF Deputy Chief Economist Elina Ribakova said, noting that liquidity was “often shallow after 2014, but now appears extreme.”
Joe Biden derided the currency as “rubble” last month, a trite remark that was destined for “gaffe” status. The Kremlin was certain to do everything in its power to support the currency given how important the exchange rate is for locals’ perception of governmental competence. Biden appeared to believe “overnight” was a term he could take literally as it relates to undermining the Russian economy. The ruble could well collapse, but it’s going to take some work (and some economic sacrifice from Germany) to turn it into the rial.
That brings us (circuitously) to Friday, when Nabiullina cut rates by 300bps (green dot in the figure, below). “External conditions for the Russian economy are still challenging, considerably constraining economic activity,” the policy statement read. “Financial stability risks are still present, but have ceased to increase for the time being, owing to capital control measures.”
It was the largest rate cut in almost 20 years. Nabiullina hiked rates to 20% in the early stages of the invasion to forestall bank runs.
“There is a steady inflow of funds to fixed-term deposits [and although] annual inflation will continue to rise due to base effects, the latest weekly data point to a noticeable slowdown in the current price growth rates, owing to the ruble’s exchange rate dynamics,” CBR went on to say.
One mainstream media outlet described Friday’s rate cut as evidence that the central bank is “confident” the coast is clear for the removal of measures aimed at preventing a meltdown. Another interpretation is that having satisfied herself that the steps Putin took to prop up the currency are sufficient to avert a spiral, Nabiullina is now moving preemptively to cushion the blow from an inevitable recession.
Recall that Nabiullina is no slouch. Far from it. As central bankers go, she knows what she’s doing. Which means she knows what’s coming. According to two-dozen economists polled by Bloomberg late last month, what’s coming is the biggest contraction in Russia’s modern history (figure below).
There’s no guarantee things will be as bad as indicated by the blue projections in the figure. The situation is the very definition of fluid. But to state the obvious, it’s hard to imagine any scenario where things turn out better economically for Russia in the near-term than they’d have turned out if Putin hadn’t invaded his neighbor.
In its efforts to undermine Putin domestically, the West is, in part, battling itself. Purchases of Russian energy are helping prop up the economy. But the US and its allies are also battling Nabiullina. Central bankers who spoke to Politico this week described her as “Moscow’s most formidable weapon against the West’s economic warfare.”
Recall that she didn’t embrace the role of wartime consigliere. Nabiullina reportedly tried to resign when Putin decided to move ahead with his “special operation” in Ukraine because she recognized the distinct possibility that her skillset would be rendered useless. She remained in her post after being told a resignation would be viewed by Putin as a “betrayal.”
“Nabiullina is extremely competent,” one monetary policymaker told Politico, citing “multiple encounters” with Putin’s shrewd, bespectacled technocrat.
That competence is Putin’s asset, but it may be Nabiullina’s liability. She could, ultimately, be sanctioned. And, as evidence mounts that the Russian war machine is committing atrocities, her once sterling legacy could be defined by complicity in one of modernity’s darker episodes.
Politico cited BlueBay’s Tim Ash and former envoy Michael McFaul, both of whom suggested Nabiullina somehow had the option to resign. I’d call that extremely disingenuous. I don’t think it’s a stretch to suggest that a resignation would be a jail sentence — or worse.
When it comes to the ruble, I should note (and regular readers will attest to this), that if there was a real comeback story to tell, I’d be among the first to tell it. I’m not “against” the ruble. The ruble didn’t invade Ukraine, and besides, my raison d’être is the intersection of geopolitics and finance. That’s direction agnostic when it comes to asset prices.
Additionally, I’m not exactly known for trafficking in normative statements. I don’t generally opine on what “should” or “shouldn’t” be happening in the world. I recognize suffering, though. So, just like everyone else, I’d rather the Ukraine conflict end because, on net, it increases the total amount of suffering experienced by sentient beings.
To the extent a weak ruble would compel the Kremlin to end the conflict, I suppose I’m “in favor” of a weak ruble, but that most assuredly wouldn’t stop me from documenting a real turnaround story if I thought there was one to tell. In the simplest possible terms: The ruble’s turnaround isn’t real. It’s rather like JGB yields — not worth mentioning because you’d need to have the dexterity of a neurosurgeon to extract whatever shards of price discovery are embedded in an otherwise fabricated asset. As Latvia’s central bank chief put it, “The [ruble] exchange rate is an imaginary number.”
In the same linked Politico article, another central bank source said Nabiullina did “all the right things” ahead of Putin’s invasion, with but a single exception: She kept her reserves outside of Russia.
The effect is almost always more important than the cars at the moment. The” alleged“ resignation had an effect on perception as to other central bankers opinion of her.
Cars being cause
In spite of what turned out to be one critical error, if there is a “peoples’ hero alive in Russia today it is surely Commissar Nabiullina. Putin couldn’t have gotten this far without her, although behind it all she is hardly an ally.
the Robert E. Lee of Russia (with obvious differences too…)