How Russia’s central banker Nabiullina dismantles what she built

Russian President Vladimir Putin. The overall picture for Russia’s economy is grim. Forecasters from the European Bank for Reconstruction and Development have predicted a 10% contraction in Russia’s economy this year.  (Photo: Reuters/Sputnik)
Russian President Vladimir Putin. The overall picture for Russia’s economy is grim. Forecasters from the European Bank for Reconstruction and Development have predicted a 10% contraction in Russia’s economy this year.  (Photo: Reuters/Sputnik)

Summary

  • Elvira Nabiullina is now striving to shield the populace from the fallout of global sanctions
  • Nabiullina has restricted money transfers abroad. She hamstrung Russian businesses that did business with foreign customers by forcing them to convert 80% of their earnings into rubles.

Elvira Nabiullina spent eight years modernizing Russian monetary policy and forging bonds with global markets. In the past six weeks, she took apart much of what she created for a new task: keeping President Vladimir Putin’s war economy humming.

Ms. Nabiullina, governor of the Russian Central Bank, is among the key players in Moscow’s efforts to prevent Western sanctions over the Ukraine invasion from causing an economic meltdown. An ally of Mr. Putin for two decades, she is the primary official responsible for stabilizing the ruble and combating inflation—tasks the Kremlin sees as essential in shielding Russia’s population from the fallout of sanctions.

She has succeeded, to some extent. A flurry of emergency measures Ms. Nabiullina enacted since the invasion helped reverse a sharp devaluation of the ruble, which is roughly back to its prewar level in dollar terms. She was able to dial back an earlier emergency interest-rate hike on Friday, lowering a key rate to 17% from 20% in a sign savers were no longer pulling cash from the banking system. But economists say the ruble’s recovery was a hollow victory, as it is now subject to myriad restrictions that limit its usefulness for many transactions.

Effectively, Ms. Nabiullina threw up new barriers between her country and global trade flows, deepening Russia’s isolation on top of what sanctions caused. She restricted money transfers abroad. She hamstrung Russian businesses that did business with foreign customers by forcing them to convert 80% of their hard-currency earnings into rubles.

She capped withdrawals from individuals’ foreign-currency bank accounts—a move that angered many Russians who had long socked away their savings in dollars or euros. The central bank has said 90% of bank deposits were too small to be affected by the cap, limiting its impact to the wealthy.

Her U-turn replaced years of liberal policies with a command-and-control approach. Russia had abandoned capital controls in 2006, and Ms. Nabiullina herself oversaw the ruble’s transition to becoming a free-floating currency in 2014.

“For years, the central bank did everything it could to help Russia integrate further into the world economy," said Andrey Movchan, a former Russian banking executive who now lives in London and leads an international asset-management business. “Then suddenly on Feb. 24, it had to do the complete opposite."

Russia’s central bank declined to make Ms. Nabiullina available for an interview, citing her busy schedule.

Known in years past for her success in curbing inflation, Ms. Nabiullina now faces surging prices that have hit Russians in the pocketbook. Annualized inflation rose to 16.7% in March, its highest rate since 2015, according to data from the country’s state statistics agency.

The overall picture for Russia’s economy is grim. As sanctions have choked off imports, and hundreds of Western companies have left the country, thousands of Russians have been furloughed from their jobs and some factories have halted production due to parts shortages. Forecasters from the European Bank for Reconstruction and Development have predicted a 10% contraction in Russia’s economy this year.

Ms. Nabiullina’s authority is broader than those of many of her Western counterparts, because the Russian Central Bank regulates the country’s financial markets, insurance companies and investment funds as well as overseeing its banks and setting monetary policy. Some of her emergency measures fulfilled Kremlin goals of retaliating against U.S. and European sanctions. In one such move, the central bank blocked foreign investors from selling tens of billions of dollars’ worth of Russian stocks.

Wartime U-turn

Until the war, Ms. Nabiullina was broadly respected by Western investors and fellow central bankers, who praised her for cleaning up abuses in the country’s banking sector. Now some former admirers are having second thoughts.

“Initially people gave her the benefit of the doubt. Now I can see what she’s done," said Panicos Demetriades, a former European Central Bank policy maker and former governor of Cyprus’s central bank, now a freelance consultant “She’s clearly been second fiddle in Putin’s orchestra."

It is a puzzle to many observers why Ms. Nabiullina has stuck with Mr. Putin despite the war, which shocked and upset many of her peers in Moscow’s educated, liberal-leaning elite. Unlike some Russian officials, she hasn’t made demonstrative statements in support of the invasion, instead avoiding the topic in public comments. Some who interacted with Ms. Nabiullina before the war assume she has reluctantly soldiered on from a sense of duty. Others say she is showing her true colors as a Kremlin loyalist.

Ewald Nowotny, a former European Central Bank policy maker who knows Ms. Nabiullina, said her decision shortly after the war began to more than double a key interest rate to 20% “in my view is a clear signal of independence, because the government clearly would prefer lower rates." He is now at the Austrian Society for European Politics, a Vienna-based think tank.

Michael McFaul, a former U.S. ambassador to Russia, initially voiced hope that she would publicly oppose the war. When she didn’t, he called for her to be sanctioned. “Her unique expertise as head of Russia’s central bank is helping to finance Putin’s barbaric killing of innocent Ukrainians," Mr. McFaul said. “By not resigning or speaking out against the war, she is directly responsible for his war too."

There are signs the war hasn’t been easy for Ms. Nabiullina, who emerged from a circle of Russian liberal reformers influential in the 1990s before Mr. Putin’s rise to power.

The Ukraine invasion blindsided her, and she initially tried to resign over the war, The Wall Street Journal reported last month, citing people familiar with the matter. The central bank denied that she tried to quit, a resignation attempt earlier reported by Bloomberg. Mr. Putin himself rebuffed rumors of her departure by nominating Ms. Nabiullina for a third term as central-bank chief—a vote of confidence that ties her even more closely to his rule.

A few days after the war began, Ms. Nabiullina urged her staff to set aside any doubts and focus on the task of rescuing the economy. “Friends, let’s remember that a lot depends on us now, so we must be united," a somber-faced Ms. Nabiullina said in a March 1 video address to employees, which the central bank confirmed as authentic after it was leaked online.

“I know it’s not easy, but really, let’s not get into political arguments at work, at home, on social media," she said. “They only burn out the strength we need to do our job."

Bleak mood

In her public appearances since the war began, Ms. Nabiullina has stopped taking questions from reporters. Observers have detected signs of a bleak new mood in her attire. Known for sending messages with brooches—such as one resembling a hawk at a March 2021 press conference announcing an interest-rate hike—Ms. Nabiullina has stuck to unadorned outfits of black or dark gray since the invasion.

The intensity of Western sanctions appears to have caught her and other Russian officials by surprise. The U.S. and its allies unplugged big Russian banks from dollar and euro trading, froze a huge chunk of the central bank’s assets and halted imports of high-tech goods.

Domestic critics of Ms. Nabiullina have attacked her for failing to stop the asset freeze. Before the war, Russia’s central bank amassed a war chest of $630 billion to ensure it could ride out any crises. Around $300 billion of that was frozen, according to Russia’s finance minister. Even though the central bank took steps to diversify its reserves into non-Western assets such as gold and the Chinese yuan, it left many more in dollars, euros and the Japanese yen and parked them in financial institutions outside Russia. That made it easy to transact with the reserves on global markets—but made them susceptible to sanctions.

“She was storing our money in the pockets of our enemies," Mikhail Delyagin, a member of the Russian parliament, said in an interview posted March 13 on his website. He didn’t respond to a request for comment.

People who know Ms. Nabiullina praise her professionalism and call her incorruptible, something that antigraft groups say is an unusual quality among Russian government officials. An opera aficionado, she is married to a fellow economist who was the longtime head of a prestigious Moscow university. Financial disclosures have listed her car as a Jaguar S-Type. A person close to the central bank said Ms. Nabiullina acquired the car more than 20 years ago.

“Nabiullina has a combination of qualities that the Kremlin likes," said Mr. Movchan, the former Russian banking executive. “She’s very professional, but at the same time she’s ready to follow directions meticulously."

Ms. Nabiullina has demonstrated an ability to operate under different ideological regimes. Educated under Communism, she espoused free-market economics during her government career, before helping enable Russia’s recent pivot into autarky, the policy in which a country limits foreign trade and pushes for self-sufficiency. On Friday, the central bank relaxed some restrictions on foreign-currency trading, a sign she is still inclined to let markets function despite Russia’s isolation.

Ms. Nabiullina was born in Ufa, an industrial city some 700 miles east of Moscow. Raised in a working-class family from the Tatar ethnic minority, she studied economics at Moscow State University—perhaps the country’s top institution of higher learning—in the late Soviet era, when Marxist-Leninist ideology still dominated the curriculum. Ms. Nabiullina was among the economics students most proficient in Karl Marx, according to a former classmate, Sergei Aleksashenko.

“She learned ‘Das Kapital’ by pages," recalled Mr. Aleksashenko, who served as a deputy finance minister and deputy central bank governor during the 1990s and now lives in the U.S. where he is a blogger and vocal critic of Mr. Putin. “If she was asked what Marx said, she could repeat, Marx said this."

Ms. Nabiullina pivoted to free-market economics with the fall of the U.S.S.R. She spent much of the 1990s working in a big-business trade group and the Russian economics ministry, where she was seen as a protégé of Yevgeny Yasin, a prominent liberal reformer. Ms. Nabiullina entered Mr. Putin’s circle in 1999, when she joined a think tank that crafted his economic program.

Putin’s trust

Over the past two decades she has been a fixture of Mr. Putin’s team, with roles that included leading the economics ministry, advising the president on policy and—since 2013—running the central bank.

Ms. Nabiullina won the Russian leader’s trust because she lacks her own political ambitions and is a stalwart inflation hawk, said Alexei Makarkin, an analyst with the Center for Political Technologies, a Moscow-based think tank. “The president’s views that the ruble can’t be allowed to fall, and hyperinflation can’t be allowed, go back to the 1990s," Mr. Makarkin said. “And he listens to the people who tell him this."

Ms. Nabiullina also nurtured close ties with the West, shuttling between international political gatherings such as the G-20, policy conferences across Europe and meetings at the Bank for International Settlements in Basel, Switzerland. Euromoney named her “Central Bank Governor of the Year" in 2015. A former U.S. Federal Reserve official noted that her English, initially shaky, improved to the point where she could speak comfortably and give policy speeches.

Four years ago, Ms. Nabiullina addressed a packed hall of International Monetary Fund officials in Washington in fluent English. Her host, Christine Lagarde—then managing director of the IMF and now president of the ECB—praised her “guts and courage" in taking on crooked Russian bankers and reminisced about going to the opera with Ms. Nabiullina at St. Petersburg’s Mariinsky Theater. In a 30-minute question-and-answer session, Ms. Lagarde carefully skirted the topic of the international sanctions imposed on Russia in 2014 over Mr. Putin’s annexation of Crimea.

“This is why you are so special, because you can make central banking sing while being very sensible indeed," Ms. Lagarde told Ms. Nabiullina. Ms. Lagarde declined to comment through a spokesman.

Some early members of Mr. Putin’s economic team broke with the Russian leader during the 2000s and 2010s, upset by his shift toward authoritarianism. But not Ms. Nabiullina, who remained a team player.

“She demonstrates her loyalty to Putin every minute, every second," said Mr. Aleksashenko, the former deputy finance minister. “You cannot stay in Putin’s team for 20 years if you’re not loyal or have contradictory ideas, if you say, ‘No Mr. Putin, you are wrong.’ It’s a personal choice—are you ready to stay with the dictator?"

Catch all the Politics News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
more

topics

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App