Nabiullina’s Miracle: Russia Cuts Rates To Pre-War Levels

Elvira Nabiullina should’ve resigned when Vladimir Putin invaded Ukraine in February. As it turns out, she tried. But Putin refused to accept her resignation. And when Putin refuses to accept your offer, that’s an offer you can’t refuse.

So, Nabiullina remained, an unsung boon to Putin’s war effort. Nabiullina, as I’ve put it, is no slouch. Indeed, central bankers who spoke to Politico in April described her as “Moscow’s most formidable weapon against the West’s economic warfare.”

Two months ago, Nabiullina began unwinding emergency rate settings in calculated steps. She completed the process on Friday with a larger-than-expected 150bps move.

After four consecutive rate cuts, including one implemented at an unscheduled meeting late last month, when the ruble’s surge was becoming a liability, the Bank of Russia’s key rate is back to pre-war levels (figure below).

Inflation moderated in May to “just” 17.1%. That was lower than the 17.4% consensus expected, but still eight percentage points above pre-war levels. Notably, monthly inflation was a benign 0.1% last month, and prices actually fell last week.

Receding inflation is a function of two things: Subdued domestic demand as the initial panic buying that followed the invasion gave way to recessionary reality, and the surging ruble, which is benefitting from capital controls and Russia’s bloated current account.

“The decline in headline inflation is largely due to a correction in prices for a small group of goods and services, after they went up sharply in March. This comes as a result of ruble exchange rate movements and the tailing-off of the surge in consumer demand in the context of a marked decline in inflation expectations of households and businesses,” the Bank of Russia said Friday, in the statement accompanying the policy decision.

Although inflation is “appreciably below” (as the bank put it) dour April forecasts, it remains “significantly above” target. I’d dryly note that “appreciably” flatters the undershoot and “significantly” understates the overshoot. CBR’s target is 4%. The bank now sees inflation running between 14% and 17% this year, down from the 18%-23% reflected in the April projections.

Those keen to perpetuate narratives about the purported “resiliency” of Putin’s economy habitually cite the current account surplus (figure below) as evidence, usually without mentioning the burden collapsing imports impose on locals. According to one estimate by Otkritie Research, whose website appeared to be unreachable on Friday, the value of imports in April may have been just $5 billion, down 81% from a year ago.

US multinationals have abandoned Russia in droves. In a truly absurd sign of the times, Belarus exported more to Russia by value than Germany in April. Moscow no longer publishes a breakdown of imports and exports. That says a lot on its own.

Russian businesses are compelled to source what they can’t get domestically from a dramatically smaller constellation of willing sellers. Even if foreign companies want to sell to Russia, they may be unable to do so due to sanctions. Russian consumers will suffer as a result. There’s no way around it. They may “adapt” and “adjust,” but it won’t be pleasant. A link to a Russian government forecast showing goods imports are likely to drop by more than 25% this year in real terms no longer worked Friday, after appearing in Western media coverage.

Nabiullina navigated an extraordinarily difficult situation with a deft hand. First, she hiked rates to 20%. Then, she let the ruble surge as soaring energy prices and collapsing imports flattered Russia’s surplus, while draconian restrictions on capital, including mandated FX sales by exporters, served as an additional firewall against depreciation. The strong ruble and slower domestic demand helped dampen inflation, while elevated rates lured back depositors. Nabiullina watched, waited, then cut rates. Then she watched some more, waited some more and cut rates some more. After that, she implemented an emergency cut to keep the ruble from overshooting. Then she watched, waited and cut rates a fourth time. Now, rates are back to February levels.

As impressive as this is, the task ahead of Nabiullina is even more challenging than the small miracle she’s already pulled off. In fact, you could argue the real work starts now. The ruble is too strong. For non-commodity exporters who aren’t benefiting from surging prices for what they sell, it’s very onerous.

Nabiullina will also need to buoy domestic demand. Notwithstanding any “resiliency,” the Russian economy is headed for a deep recession. It’s just a matter of how deep.

The annotated figure (above) may turn out to be too pessimistic. But even if this year’s contraction is only half as large as the illustration suggests, aggressive easing would still be required to firm up local sentiment and ease upward pressure on the currency.

Nabiullina averted a catastrophe. Now, she needs to steer Russia through a transition process defined by economic regression. “Survey data show that enterprises are still struggling to fix production and logistics — despite the nascent diversification in suppliers of finished products, raw materials and components, as well as in sales markets,” the Bank of Russia said Friday.

On Thursday, Putin signed a decree indicating that going forward, the amount of foreign currency exporters will be required to convert to rubles will be determined by a government commission. In all likelihood, that means the Kremlin will dynamically adjust capital controls depending on conditions. In the near-term, it almost surely means the ratio will be lowered considering what, at this point, it’s fair to call unwanted ruble strength.

Underscoring the strength of the crosscurrents Nabiullina is attempting to navigate, the bank’s policy statement noted that “consumer activity in real terms is on the decline as households show a high propensity to save and real incomes shrink.” Just a few sentences later, the same policy statement said that, “the effect of proinflationary factors is likely to be accentuated by high inflation expectations [and] an excessive reduction in households’ propensity to save may lead to consumer demand outstripping the capacity to expand output.”

In short, the bank said, “the combination of risks created by the external environment may produce both proinflationary and disinflationary effects.”

This is why Putin insisted Nabiullina remain in her post. A less capable policymaker would’ve almost surely folded. In the end, though, Nabiullina’s most difficult task won’t be rescuing the Russian economy. It’ll be living with her complicity if she does.


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5 thoughts on “Nabiullina’s Miracle: Russia Cuts Rates To Pre-War Levels

  1. I guess the same as with China:
    It’s safe to assume the numbers are indeed doctored, to a degree. Yet only to a degree, as it’s impossible, even in Putins Russia, to totally circumvent reality. Plus, there is also data from the IMF, BIS etc., to corroborate most claims. Certainly there is a good chance the russian numbers will be off by 1-3 %. But probably not more. The fact that the BoR even publishes the above mentioned data shows that they are aware of that.

    1. I make no secret of my anti-Kremlin bias, but if the conversation is strictly about data and making charts, I’ll take Putin’s data over Xi’s.

  2. good point, the tendency to polish the data is probably more ingrained at all levels within the Chinese reporting system.
    Also, at least in the past, Russia seemed to care less if some goals of the latest 5-Year -Pan have not been met. Especially since there was no 5-Year-Plan in Russia, contrary to China.
    Now, however, I would tend to discount all info emanating from official russian sources, as I do believe Putin would not want to project any weakness (real or perceived) by publishing “too bad” numbers.

  3. from 50k feet, seems to me that we should poach Nabiullina. she probably would make a great fed governor, if not chairman.

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