On Friday, Elvira Nabiullina cut Russia’s key rate for the second time since an emergency hike aimed at forestalling bank runs following Vladimir Putin’s decision to invade Ukraine.
In the statement accompanying the move, CBR said annual inflation was running near 18% as of April 22. That was up from 16.7% in March and 9% prior to the onset of hostilities.
Friday’s cut was 300bps, which suggests real rates in Russia are now deeply negative. At the risk of lapsing into colloquialisms, there’s no telling where things go from here, hence the “limbo” characterization in the chart subheading (below).
In explaining the rate cut, CBR cited reduced risks to financial stability and “a slowdown” in the pace of inflation “on the back of a strengthening ruble and cooling consumer activity.”
The bank’s forecasts and outlook were the furthest thing from rosy, though. Annual inflation may reach 23% this year before decelerating to between 5% and 7% in 2023, the bank said. The statement noted “a further exacerbation of external trade and financial restrictions” and admitted that in the near-term, inflation expectations could become “unanchored” thereby “accentuat[ing]” price pressures. As for growth, CBR sees GDP contracting by as much as 10% in 2022, consistent with external forecasts.
It’s very difficult to square all of that with the notion — as perpetuated by sundry “alternative” financial portals and counternarrative disseminated on social media — that the Russian economy is resilient or otherwise poised to “shrug it off,” as it were.
At some point, the tension between Nabiullina’s reality-based assessment and the Kremlin’s alternative facts will need to be reconciled. Consider, for example, that Dmitry Peskov on Friday suggested Moscow is actively considering a gold peg. It’s “now being discussed,” Peskov mused, apparently referencing Nikolai Patrushev, Putin’s Security Council Secretary, who told state media the following when asked what Russia needs to do to “ensure the sovereignty of the ruble”:
For a national financial system to be sovereign, its means of payment must have intrinsic value and price stability. Experts are working on a project… to determine the value of the ruble, which should be backed by both gold and a group of goods.
Patrushev didn’t say who those “experts” where, but Nabiullina apparently isn’t among them. “No,” she told reporters on Friday, when asked about the possibility of a gold peg. “It’s not being discussed in any way,” she added.
She went on to insist (literally) that the ruble continue to float, while admitting that capital controls and the challenging external environment mean the currency will be a volatile beast, at least temporarily. Russia’s favorable trade balance alongside surging commodity prices have supported the currency, but do yourself a favor: Don’t fall for cheap charts suggesting all’s well just because USDRUB is back to pre-war levels. Putin imposed capital controls. The exchange rate can’t be taken at face value.
Some mainstream media outlets mentioned Zoltan Pozsar while documenting Nabiullina’s flat rejection of a gold-backed system. Pozsar’s “new monetary world order” thesis has been hijacked and coopted by would-be “contrarian” macro pundits, as well as purveyors of Kremlin-sponsored content. Zhao Lijian, a spokesman for China’s Foreign Ministry, on Friday touted “a new model of international relations” based on what he called “the success” of China’s strategic partnership with Russia.
Nabiullina was widely respected prior to the Ukraine war, but now risks being remembered as an accomplice in Putin’s conquest. Canada sanctioned Nabiullina last week, and it seems likely other nations will follow.
In her official statement accompanying Friday’s policy decision, Nabiullina adopted a somewhat constructive cadence, but didn’t mince words. She said elevated inflation in the near-term is “inevitable” under the circumstances and as such, suggested there’s no point leaning against it.
Attempting to bring inflation back to target now would “squeeze demand, hamper[ing] the structural transformation of the economy,” she remarked, adding that the knock-on effect would be “a situation where prices would grow slowly, but the range of goods and services would become increasingly more limited and some essential products would simply be unavailable.”
Read more: The Imaginary Ruble And Putin’s ‘Most Formidable Weapon’
This central banker’s statements are either insightful or defeatist: let inflation run hot to allow the economy to adjust.
It’s surprising they’re expecting inflation to cool down. Either think they can make do without the West or this is a boilerplate central bank speech: “don’t worry, let me anchor your inflation expectations”.