Kremlin technocrat: The banker who saves Putin

Technocrat of the Kremlin
The banker who saves Putin

By Jan Ganger

Before the war, Russia’s central bank governor was a world-respected economist. Elwira Nabiullina is now successfully fighting the consequences of the sanctions and is destroying what she has built up over the past few years.

Face ashen, dressed all in black, head in right hand: Elvira Nabiullina, governor of the Central Bank of Russia, sits at the end of a very long table in the Kremlin. At the other end, about six meters from the other participants in the meeting, sits Russian President Vladimir Putin. The 58-year-old is apparently trying to find out what kind of situation she is in and to understand how it could have happened.

Elvira Nabiullina and Maxim Oreshkin, an adviser to the Russian President, at a meeting with Vladimir Putin.

(Photo: imago images/ITAR-TASS)

Four days earlier, Russia launched a war of aggression against Ukraine. The ruble had plummeted almost 30 percent. The West had fired a volley of sanctions, even hitting Russia’s central bank. Nabiullina had previously carried out many stress tests for banks and the financial system, the Financial Times quotes a former senior official who knows the economist. “But no one told her it was about that [zu einer Invasion] will come.”

Although Nabiullina had the consequences of excluding Russian banks from the Swift communications network analyzed, she had not expected sanctions from the central bank. And suddenly it has to help stabilize the economy and financial system of a country at war.

Before the attack on Ukraine had itself Nabiullina has built a solid reputation since she became governor of Russia’s central bank in 2013. She cleaned up the banking sector and wound up some financial institutions that had gotten into trouble. It managed to push inflation in Russia down to its lowest level since the collapse of the Soviet Union. In the spring, she set the goal of keeping inflation below four percent. Meanwhile, the Kremlin was massing troops on the border with Ukraine.

Large currency treasury created

Nabiullina achieved her first success as central bank governor after Russia annexed Crimea. Falling oil prices and sanctions imposed by the US and EU caused the ruble to lose about half its value. It relied on orthodox methods, burned a total of around $70 billion in foreign exchange reserves and catapulted the key interest rate to more than 17 percent – but eventually the economy grew again, inflation fell noticeably and the ruble regained strength without central bank intervention.

Nabiullina managed to amass one of the world’s largest foreign exchange reserves – the treasure was worth $643 billion before the attack. According to the Western reactions to the annexation of Crimea, the goal was to create a sufficiently large treasury to withstand possible Western economic sanctions in the future without major damage.

Investors celebrated the central banker, the then IMF head and current ECB President Christine Lagarde compared her skills in 2018 with those of a “great conductor.” Trade journals such as “Euromoney” and “The Banker” saw her as one of the best monetary politicians.

Today stands Nabiullina before a completely different task. The Russian economy has been hit by severe Western sanctions, and hundreds of foreign companies have left the country. The consequences are being felt more and more in Russia:

The economy has collapsed. Nabiullina expects a minus of more than 9 percent and inflation of more than 20 percent for this year. In the Russian parliament, she acknowledged “difficulties” in the entire Russian economy and spoke of a “structural transformation” that was necessary in view of the sanctions. “She puts on a brave face while the economy is struggling,” according to the Wall Street Journal.

Rubles back to old strength

Not only is the Russian economy struggling, so is the central bank. One problem with this is that because of the sanctions, it cannot access a large part of the foreign exchange treasure. But below Nabiullina’s leadership still managed to limit the damage. The ruble is back to pre-Ukraine levels, and Russia has so far managed to pay off its external debt despite sanctions, thereby avoiding technical bankruptcy.

However, the price for this is high. Interest rates were doubled and Russia introduced capital controls to prevent foreign exchange from flowing abroad. Foreigners are not allowed to sell Russian stocks on the Moscow Stock Exchange. Exporters – including energy giants Gazprom and Rosneft – have to exchange euro and dollar earnings for roubles, taking on the role of central bank in supporting the rouble. Russian companies are no longer allowed to borrow in foreign currency.

That is exactly the opposite of what the economically liberal economist wants. The war is destroying what it has built up over the past few years: its economic principles and its reputation. It helps Russia to continue the war. “She is a very professional, experienced macroeconomist and central banker,” Ukraine’s central bank chief Valeria Hontareva told the Financial Times about her counterpart. “But without values, professionalism is worthless”.

The lover of operas and French poetry apparently wanted to resign from her post after the attack on Ukraine. According to the financial news agency Bloomberg, however, Putin instructed her to remain in office. The Russian President is delighted with Nabiullina and ensured that she has to start her third term in June.

“Must Be Loyal”

The ethnic Tatar is one of the few women to hold a top job in the Russian administration. According to reports, her resignation in the current situation would probably have been seen by Putin as a betrayal. Nabiullina has been working with him for more than 20 years. Before moving to head the central bank, she had been Minister for Economic Development since 2007.

Nabiullina has not spoken publicly about the war. But in the face of a wave of layoffs at the central bank, according to Bloomberg, in a video addressed to employees, she asked people to avoid “political discussions” that only “sap up the energy we need to do our job.” According to the head of the central bank, the economic situation is “extreme”. “We all wished that none of this had happened.”

“She thinks that her job is important for the Russian people and that she can do it better than anyone else, which is not unlikely,” Sergei Guriyev told the Financial Times. The Russian economist teaches in exile in Paris at the University of Sciences Po. “So she must be loyal to Putin and cannot resign.” If she turns against Putin, she will be thrown out and will no longer be able to help the Russians.

Ukraine’s central bank governor Hontareva comes to a different verdict: “The only way forward for her is to stabilize the exchange rate (…) and prevent a bank panic – and then write her resignation letter.” Then she will be a globally respected person. Otherwise she will find herself in front of the International Criminal Court in The Hague “with all the other bandits”.

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