It used to be a standing guessing game on social media in Moscow: Want to know whether interest rates are going up or down? Answer: Watch to see what kind of brooch the chair of the Russian Central Bank, Elvira Nabiullina, is wearing at her next press conference. A red bird could mean one thing; a white pigeon another; a miniature “Nevalyashka” doll, a toy that pops back up when pushed over, was a response to COVID. Nabiullina, amused by the game, dismissed all guesses with a smile. But since February 24, she dresses only in black, and the brooches are gone.
It's a powerful statement—but of what? Over the four months since Russia invaded Ukraine, the Russian economy has been buffeted by an unprecedented storm of economic sanctions imposed by the West. The Russian Central Bank and its chief have been at the storm’s center. But is Nabiullina opposed to the war? If so, why has she not resigned?
In my last post on Substack I described the sanctions and the way they operate. This time I invite you to join me in looking at their impact on Russia, and the ways the Russians have responded. At the end we’ll come back to our mystery question—what about Nabiullina?
The Impact of the Sanctions so Far, and the Russians’ Response
Russia is no stranger to economic storms. It went through major financial crashes in 1989, 1998, and 2008-9. But those were not due to sanctions. Russia’s first experience with sanctions followed the Crimean/Donbas crisis of 2014-5. In retrospect it was a kind of dress rehearsal for the present round: the Central Bank raised interest rates to control inflation; it hoarded foreign-exchange reserves; it recapitalized debt-ridden state banks; and it adopted a floating exchange rate. If this list of measures sounds familiar, it’s because it came straight out of the playbook of the International Monetary Fund and modern macroeconomic doctrine, such as using interest rates to “target” inflation, and allowing the currency to “float,” subject only to supply and demand. That’s no accident. Most of the Russian monetary and fiscal team consists of alumni and proteges of the financial advisors Putin brought with him from Saint Petersburg in the early 2000s. They either studied in the West—Ksenia Yudaeva, for example, the first deputy chair of the Central Bank, earned her doctorate at MIT—or they trained under the early “market liberals” of the 1980s. You might say they are old hands at sanctions management.
The short-term impact of the new Russia sanctions
But the February 24 invasion and the Western sanctions that immediately followed clearly took the Russians by surprise. For the first few weeks the entire country was in a panic. The ruble lost half of its value overnight, plunging from 70 to the dollar to under 140. Inflation immediately jumped to 18 percent. Anyone who could get their hands foreign exchange rushed to get it out of the country or to hide it under mattresses. The stock market cratered. Storefronts shuttered. The economy slammed to a halt.
But after the initial shock, the government’s financial team responded quickly, using essentially the same tools as in 2014-15. This took three main directions:
· First, “circle the wagons,” to deal with the immediate economic repercussions of the sanctions, chiefly by imposing capital controls to shut off the mass exodus of foreign capital, and by raising interest rates to rescue the falling ruble and bring down inflation.
· Second, “head off the worst,” through measures to protect current production, by lowering taxes on businesses and allowing parallel “gray” imports to replace sanctioned goods (especially spare parts and components) and closing an eye to the illegal use of foreign brands and patents.
· Third, “make life easier for industry,” by declaring a moratorium on bankruptcies, decriminalizing debts, increasing state spending on key sectors (notably the arms industry) and relaxing restrictions on imports of foreign technology (at least where these are still possible).
These emergency measures were pragmatic and prompt, and by the beginning of May they had succeeded in reversing the initial free fall of the economy. The mood in Russia noticeably improved: according to the Levada Center, Russia’s sole surviving independent pollster, Russian consumers have begun to recover from the initial shock and are finding ways to adapt in their everyday lives.
Good luck played a part. Unlike previous crises, the Russian invasion came at a time of skyrocketing oil and gas prices, as global demand recovered from the COVID-19 pandemic. The war itself then drove energy prices even higher. Russia’s response was to expand oil exports wherever possible, while rationing gas exports to keep gas prices high (the more recent gas cutoffs will be discussed in a coming post). As a result, Russia is enjoying record export revenues; and since its imports have simultaneously fallen sharply (as I discuss below), its balance of payments is likewise at an all-time high.
But ironically, the flood of revenue from hydrocarbon exports has turned into a mixed blessing, since it has caused the ruble, after an initial fall, to rise sharply. A high ruble does two things, both of them bad from the government’s point of view. First, since most Russian oil and gas is produced using rubles (for wages and other operating costs, etc.) and is then sold abroad for dollars and euros, a high ruble makes exports less profitable. This in turn lessens the revenues exporters pay to the government in taxes and dividends. At the same time the government’s non-energy revenues have declined and its expenditures have ballooned. As a result, the budget has now gone into deficit--—an awkward predicament for a government that has a large welfare state and a war to finance simultaneously.
That’s only the beginning. Russia is, in effect, sitting on a mountain of foreign exchange that it cannot spend, because of the financial sanctions. In normal times, a high ruble would stimulate imports and bring the balance of trade back into alignment. But the financial sanctions prevent the government, businesses, and ordinary citizens from moving foreign exchange out of the country, whether to pay debts, to make investments, or simply to buy things. So the mountain of foreign currency is only growing higher.
To deal with this double emergency, the Russian Central Bank in May hurriedly reversed course and began lowering the interest rate again to bring the ruble back down, while simultaneously loosening capital controls and allowing both businesses and consumers to tap into their foreign exchange accounts in Russia and abroad, to buy rubles on the open market, and to export foreign exchange where they can. These measures have boosted imports slightly, especially of consumer goods. But despite the Central Bank’s efforts the ruble has kept on rising, and the budget deficit is likely to worsen for the rest of this year and beyond.
The Western media have focused much of their attention on Russia’s ballooning revenues from energy exports, and have concluded that the Western sanctions are not working. But in reality, as we have just seen Russia’s main vulnerability stems from the financial sanctions. Far from failing, these are in fact working quite effectively. (Of course, they have not led Putin to the negotiating table on the war, but that is a separate question.)
Russia’s economic team knows it. Their concern was plainly on view last month, at Russia’s annual international investment forum in Saint Petersburg.
Defiance and Gloom in Saint Petersburg
For a quarter-century the Saint Petersburg Forum (known as SPIEF) has been a super-jamboree where hundreds of Western companies gathered to discuss deals with Russian business prospects. Saint Petersburg is an ideal location. At this time of year gentle breezes waft from the Gulf of Finland, the former Russia capital shows off its European finery, and the daylight seems to last forever. I have attended it many times over the last two decades.
This year SPIEF held its 25th meeting on schedule, but this time it was an embarrassing failure. The organizers claimed a record turnout and a record number of agreements signed, but practically no Western companies attended; the attendees were almost all from developing countries--including a delegation from the Afghan Taliban; and most of the announced agreements were between Russian companies talking to themselves. Nothing could have symbolized better the transformation that the post-invasion sanctions, in just one hundred days, have already wrought on Russia’s standing in the world.
The speeches and interviews by Russians were of two sorts: predictably upbeat and defiant from the Kremlin and the administration, but gloomy from the economic team. Putin himself, in his speech to the conference (delivered by video), delivered a predictable rant, and painted a confident picture of a Russia turned toward the east and south, fully equipped to prosper without the west. But the economic team was noticeably less upbeat. German Gref, one of Putin’s earliest economic advisors and today the chairman of Sberbank, declared that the Russian economy would not recover to its 2021 level before the early 2030s. Others saw a Russia turned inward and isolated from the world economy. But Nabiullina sounded the gloomiest note of all, when she said that the new regime would “last for a long time, if not forever.” The result , she says, will be a far-reaching “structural transformation” of the economy, with mostly negative consequences.
Nabiullina’s public comments on the outlook for the economy, in this and other venues, have been so consistently dark that they sparked rumors in late February, which were quickly picked up by the Western media, that she had attempted to resign from the Central Bank, but that Putin had blocked her from doing so. Nabiullina vehemently denies the story, and there has been no independent confirmation of it. But there is no gainsaying the fact that Nabiullina and her team at the Central Bank are deeply unhappy about the implications of the invasion and the sanctions for the future of the Russia economy.
But this brings us back to the question I raised at the beginning: Why don’t they quit? Nabiullina’s past suggests the answer. Throughout her career, Nabiullina has served two causes. The first, beginning with her doctorate at Moscow State University under a prominent market reformer of the Gorbachev era, is the development of a modern market economy in Russia. But at the same time, Nabiullina has always been a devoted servant of the Russian state, with nearly a decade as minister of the economy before she moved to the Russian Central Bank. One might call her the ultimate “market technocrat.”
In this respect Nabiullina symbolizes the dilemma of the generation of economic reformers who have led financial, monetary, and fiscal policy under Putin. As a group, they are exceptionally able. Nabiullina herself, after guiding Russia through the “Great Recession” of 2008-9, was hailed as “Banker of the Year” by western financial media, and is highly regarded as a peer by other central bankers.
But the invasion and the sanctions present them with acute moral and political dilemmas. If the market technocrats leave, the way is open for a conservative backlash and a massive rollback to Soviet-era mismanagement of the economy. The future welfare of 145 million Russians, they tell themselves, is at stake. This view is reportedly shared by the staff of the Central Bank as a whole. Out of some 50,000 employees, only about 50 have left the bank. The watchword inside the Bank is, “Serve the country, and stay out of politics.” The conclusion is clear: Nabiullina is not about to resign.
Yet this position will become increasingly difficult to sustain as time goes on. In May of this year, Alexander Morozov, the head of the Central Bank’s research department, spelled out on the Central Bank’s website what “structural transformation” actually means: “Technological regression in many sectors”…with “less advanced technologies”—in a word, “reverse industrialization.” Every sentence compounded the gloom, as Morozov went on to predict a lower share of imports and exports, an increasingly closed economy, and declining GDP. And even though the article carefully noted that Morozov’s views did not represent the official position of the Central Bank, it is hard to imagine that it was not approved higher up.
Pressure is mounting steadily on the Central Bank to modify its approach, and drop the floating exchange rate for old-fashioned intervention, buying foreign currency to peg the ruble. But to what? The Ministry of Finance is reportedly considering converting rubles into Chinese yuan and Indian rupees, thus constituting a “non-reserve reserve” made up solely of currencies from “friendly” countries. Nabiullina has pushed back strongly, arguing that this would only make Russia hostage to the monetary policies of other countries, and ultimately—because of the continuing dominant position of the dollar in the world economy—would amount to pegging the ruble to the dollar. So far, with Putin’s support, she has managed to prevail.
But as the ruble continues to climb, the influential Russian export community is clamoring for the government to bring down the ruble “by whatever means,” which, in Nabiullina’s view, would bring economic chaos. Yet she may be forced to compromise—or to leave.
In short, it could be a long time before Nabiullina’s favorite brooch, the pop-up “Nevalyashka” doll, appears in public again.
The Case of the Missing Brooch
The Case of the Missing Brooch
The Case of the Missing Brooch
It used to be a standing guessing game on social media in Moscow: Want to know whether interest rates are going up or down? Answer: Watch to see what kind of brooch the chair of the Russian Central Bank, Elvira Nabiullina, is wearing at her next press conference. A red bird could mean one thing; a white pigeon another; a miniature “Nevalyashka” doll, a toy that pops back up when pushed over, was a response to COVID. Nabiullina, amused by the game, dismissed all guesses with a smile. But since February 24, she dresses only in black, and the brooches are gone.
It's a powerful statement—but of what? Over the four months since Russia invaded Ukraine, the Russian economy has been buffeted by an unprecedented storm of economic sanctions imposed by the West. The Russian Central Bank and its chief have been at the storm’s center. But is Nabiullina opposed to the war? If so, why has she not resigned?
In my last post on Substack I described the sanctions and the way they operate. This time I invite you to join me in looking at their impact on Russia, and the ways the Russians have responded. At the end we’ll come back to our mystery question—what about Nabiullina?
The Impact of the Sanctions so Far, and the Russians’ Response
Russia is no stranger to economic storms. It went through major financial crashes in 1989, 1998, and 2008-9. But those were not due to sanctions. Russia’s first experience with sanctions followed the Crimean/Donbas crisis of 2014-5. In retrospect it was a kind of dress rehearsal for the present round: the Central Bank raised interest rates to control inflation; it hoarded foreign-exchange reserves; it recapitalized debt-ridden state banks; and it adopted a floating exchange rate. If this list of measures sounds familiar, it’s because it came straight out of the playbook of the International Monetary Fund and modern macroeconomic doctrine, such as using interest rates to “target” inflation, and allowing the currency to “float,” subject only to supply and demand. That’s no accident. Most of the Russian monetary and fiscal team consists of alumni and proteges of the financial advisors Putin brought with him from Saint Petersburg in the early 2000s. They either studied in the West—Ksenia Yudaeva, for example, the first deputy chair of the Central Bank, earned her doctorate at MIT—or they trained under the early “market liberals” of the 1980s. You might say they are old hands at sanctions management.
The short-term impact of the new Russia sanctions
But the February 24 invasion and the Western sanctions that immediately followed clearly took the Russians by surprise. For the first few weeks the entire country was in a panic. The ruble lost half of its value overnight, plunging from 70 to the dollar to under 140. Inflation immediately jumped to 18 percent. Anyone who could get their hands foreign exchange rushed to get it out of the country or to hide it under mattresses. The stock market cratered. Storefronts shuttered. The economy slammed to a halt.
But after the initial shock, the government’s financial team responded quickly, using essentially the same tools as in 2014-15. This took three main directions:
· First, “circle the wagons,” to deal with the immediate economic repercussions of the sanctions, chiefly by imposing capital controls to shut off the mass exodus of foreign capital, and by raising interest rates to rescue the falling ruble and bring down inflation.
· Second, “head off the worst,” through measures to protect current production, by lowering taxes on businesses and allowing parallel “gray” imports to replace sanctioned goods (especially spare parts and components) and closing an eye to the illegal use of foreign brands and patents.
· Third, “make life easier for industry,” by declaring a moratorium on bankruptcies, decriminalizing debts, increasing state spending on key sectors (notably the arms industry) and relaxing restrictions on imports of foreign technology (at least where these are still possible).
These emergency measures were pragmatic and prompt, and by the beginning of May they had succeeded in reversing the initial free fall of the economy. The mood in Russia noticeably improved: according to the Levada Center, Russia’s sole surviving independent pollster, Russian consumers have begun to recover from the initial shock and are finding ways to adapt in their everyday lives.
Good luck played a part. Unlike previous crises, the Russian invasion came at a time of skyrocketing oil and gas prices, as global demand recovered from the COVID-19 pandemic. The war itself then drove energy prices even higher. Russia’s response was to expand oil exports wherever possible, while rationing gas exports to keep gas prices high (the more recent gas cutoffs will be discussed in a coming post). As a result, Russia is enjoying record export revenues; and since its imports have simultaneously fallen sharply (as I discuss below), its balance of payments is likewise at an all-time high.
But ironically, the flood of revenue from hydrocarbon exports has turned into a mixed blessing, since it has caused the ruble, after an initial fall, to rise sharply. A high ruble does two things, both of them bad from the government’s point of view. First, since most Russian oil and gas is produced using rubles (for wages and other operating costs, etc.) and is then sold abroad for dollars and euros, a high ruble makes exports less profitable. This in turn lessens the revenues exporters pay to the government in taxes and dividends. At the same time the government’s non-energy revenues have declined and its expenditures have ballooned. As a result, the budget has now gone into deficit--—an awkward predicament for a government that has a large welfare state and a war to finance simultaneously.
That’s only the beginning. Russia is, in effect, sitting on a mountain of foreign exchange that it cannot spend, because of the financial sanctions. In normal times, a high ruble would stimulate imports and bring the balance of trade back into alignment. But the financial sanctions prevent the government, businesses, and ordinary citizens from moving foreign exchange out of the country, whether to pay debts, to make investments, or simply to buy things. So the mountain of foreign currency is only growing higher.
To deal with this double emergency, the Russian Central Bank in May hurriedly reversed course and began lowering the interest rate again to bring the ruble back down, while simultaneously loosening capital controls and allowing both businesses and consumers to tap into their foreign exchange accounts in Russia and abroad, to buy rubles on the open market, and to export foreign exchange where they can. These measures have boosted imports slightly, especially of consumer goods. But despite the Central Bank’s efforts the ruble has kept on rising, and the budget deficit is likely to worsen for the rest of this year and beyond.
The Western media have focused much of their attention on Russia’s ballooning revenues from energy exports, and have concluded that the Western sanctions are not working. But in reality, as we have just seen Russia’s main vulnerability stems from the financial sanctions. Far from failing, these are in fact working quite effectively. (Of course, they have not led Putin to the negotiating table on the war, but that is a separate question.)
Russia’s economic team knows it. Their concern was plainly on view last month, at Russia’s annual international investment forum in Saint Petersburg.
Defiance and Gloom in Saint Petersburg
For a quarter-century the Saint Petersburg Forum (known as SPIEF) has been a super-jamboree where hundreds of Western companies gathered to discuss deals with Russian business prospects. Saint Petersburg is an ideal location. At this time of year gentle breezes waft from the Gulf of Finland, the former Russia capital shows off its European finery, and the daylight seems to last forever. I have attended it many times over the last two decades.
This year SPIEF held its 25th meeting on schedule, but this time it was an embarrassing failure. The organizers claimed a record turnout and a record number of agreements signed, but practically no Western companies attended; the attendees were almost all from developing countries--including a delegation from the Afghan Taliban; and most of the announced agreements were between Russian companies talking to themselves. Nothing could have symbolized better the transformation that the post-invasion sanctions, in just one hundred days, have already wrought on Russia’s standing in the world.
The speeches and interviews by Russians were of two sorts: predictably upbeat and defiant from the Kremlin and the administration, but gloomy from the economic team. Putin himself, in his speech to the conference (delivered by video), delivered a predictable rant, and painted a confident picture of a Russia turned toward the east and south, fully equipped to prosper without the west. But the economic team was noticeably less upbeat. German Gref, one of Putin’s earliest economic advisors and today the chairman of Sberbank, declared that the Russian economy would not recover to its 2021 level before the early 2030s. Others saw a Russia turned inward and isolated from the world economy. But Nabiullina sounded the gloomiest note of all, when she said that the new regime would “last for a long time, if not forever.” The result , she says, will be a far-reaching “structural transformation” of the economy, with mostly negative consequences.
Nabiullina’s public comments on the outlook for the economy, in this and other venues, have been so consistently dark that they sparked rumors in late February, which were quickly picked up by the Western media, that she had attempted to resign from the Central Bank, but that Putin had blocked her from doing so. Nabiullina vehemently denies the story, and there has been no independent confirmation of it. But there is no gainsaying the fact that Nabiullina and her team at the Central Bank are deeply unhappy about the implications of the invasion and the sanctions for the future of the Russia economy.
But this brings us back to the question I raised at the beginning: Why don’t they quit? Nabiullina’s past suggests the answer. Throughout her career, Nabiullina has served two causes. The first, beginning with her doctorate at Moscow State University under a prominent market reformer of the Gorbachev era, is the development of a modern market economy in Russia. But at the same time, Nabiullina has always been a devoted servant of the Russian state, with nearly a decade as minister of the economy before she moved to the Russian Central Bank. One might call her the ultimate “market technocrat.”
In this respect Nabiullina symbolizes the dilemma of the generation of economic reformers who have led financial, monetary, and fiscal policy under Putin. As a group, they are exceptionally able. Nabiullina herself, after guiding Russia through the “Great Recession” of 2008-9, was hailed as “Banker of the Year” by western financial media, and is highly regarded as a peer by other central bankers.
But the invasion and the sanctions present them with acute moral and political dilemmas. If the market technocrats leave, the way is open for a conservative backlash and a massive rollback to Soviet-era mismanagement of the economy. The future welfare of 145 million Russians, they tell themselves, is at stake. This view is reportedly shared by the staff of the Central Bank as a whole. Out of some 50,000 employees, only about 50 have left the bank. The watchword inside the Bank is, “Serve the country, and stay out of politics.” The conclusion is clear: Nabiullina is not about to resign.
Yet this position will become increasingly difficult to sustain as time goes on. In May of this year, Alexander Morozov, the head of the Central Bank’s research department, spelled out on the Central Bank’s website what “structural transformation” actually means: “Technological regression in many sectors”…with “less advanced technologies”—in a word, “reverse industrialization.” Every sentence compounded the gloom, as Morozov went on to predict a lower share of imports and exports, an increasingly closed economy, and declining GDP. And even though the article carefully noted that Morozov’s views did not represent the official position of the Central Bank, it is hard to imagine that it was not approved higher up.
Pressure is mounting steadily on the Central Bank to modify its approach, and drop the floating exchange rate for old-fashioned intervention, buying foreign currency to peg the ruble. But to what? The Ministry of Finance is reportedly considering converting rubles into Chinese yuan and Indian rupees, thus constituting a “non-reserve reserve” made up solely of currencies from “friendly” countries. Nabiullina has pushed back strongly, arguing that this would only make Russia hostage to the monetary policies of other countries, and ultimately—because of the continuing dominant position of the dollar in the world economy—would amount to pegging the ruble to the dollar. So far, with Putin’s support, she has managed to prevail.
But as the ruble continues to climb, the influential Russian export community is clamoring for the government to bring down the ruble “by whatever means,” which, in Nabiullina’s view, would bring economic chaos. Yet she may be forced to compromise—or to leave.
In short, it could be a long time before Nabiullina’s favorite brooch, the pop-up “Nevalyashka” doll, appears in public again.