Understanding the Discord Between Russia’s Central Bank and the Kremlin

Russia has been facing rising inflation and a plunging currency, which has highlighted a growing disagreement between the Kremlin and the country’s central bank. In response to the rapid depreciation of the ruble currency, the Central Bank of Russia (CBR) held an emergency meeting and decided to increase interest rates by a significant 350 basis points to 12%. This move was aimed at curbing price stability risks due to inflationary pressure building up. The central bank stated that the recent acceleration of inflation and the weakening currency were the outcomes of “loose monetary policy” and emphasized that it possessed the necessary tools to rectify the situation.

The Russian central bank had initially attributed the inflation and currency frailties to the country’s shrinking balance of trade, as the current account surplus fell significantly by over 85% year on year from January to July. However, President Vladimir Putin’s economic advisor, Maxim Oreshkin, suggested otherwise in an op-ed, arguing that loose monetary policy was to blame, and the central bank had the means to normalize the situation. This conflicting view between the Kremlin and the central bank alludes to the underlying problems faced by the Russian economy.

Analysts have pointed to Western sanctions as the main culprits behind Russia’s economic challenges. Agathe Demarais, the global forecasting director at the Economist Intelligence Unit, explained that the decline in Russia’s current account surplus resulted from both the curbing of hydrocarbon export revenues and the increase in import costs due to sanctions. This vicious cycle has been further exacerbated by the weakening ruble, which raises import costs even more. Demarais emphasized that the Russian currency had entered a difficult situation that would be hard to escape from, and higher interest rates alone would not be sufficient to stabilize the ruble or help it appreciate against major currencies.

Given the ongoing deterioration of the ruble, Russian authorities are reportedly considering reintroducing capital controls. This could involve the compulsory sale of foreign currency revenues for exporters. The central bank’s rate hike, though intended to slow down the currency’s decline, proved insufficient. Stephanie Kennedy, an economist at Julius Baer, believes that doubling down on capital controls and enforcing the rule that exporters must exchange their U.S. dollar earnings into rubles are the most probable actions in the near future. She explained that the devaluation was not driven by speculative momentum but rather by the relative flow of exports and imports. The decline in exports, particularly since G7 countries imposed a price cap on Russian crude oil, coupled with a surge in imports for the war effort, contributed to the imbalance.

Kennedy noted that the current account surplus, while significantly reduced, remains at a tolerable level and within historical averages. Additionally, a weak currency raises the ruble value of Russia’s oil revenues but also leads to higher import costs. Russian Deputy Prime Minister Andrey Belousov has previously stated that a ruble value of 80-90 to the dollar would be ideal for the country’s budget, importers, and exporters. Aggressive interest rate hikes are unlikely to be pursued, as they would primarily harm consumers and local businesses, further undermining public support for the war. Julius Baer predicts that the ruble will appreciate slightly, with exchange rates of around 92 to the dollar in three months and 95 in 12 months, although trading in the ruble remains uncertain and challenging.

The discord between Russia’s central bank and the Kremlin regarding the causes of the country’s currency troubles reflects the complex economic challenges faced by Russia. The impact of Western sanctions on the country’s exports and the subsequent surge in import costs have contributed to the depreciation of the ruble. The central bank’s emergency rate hike attempts to address these inflationary pressures, but further actions such as capital controls may be necessary. Balancing the need for stabilizing the ruble with supporting economic growth and maintaining social stability poses a significant challenge for Russia’s government. As the situation unfolds, the country will need to carefully navigate these difficult circumstances to foster a sustainable economic path forward.


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