How Russia's central bank
chief held the line
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[September 26, 2016]
By Elena Fabrichnaya and Katya Golubkova
MOSCOW
(Reuters) - One Thursday evening in March, Elvira Nabiullina, governor
of Russia's central bank, faced down a rival in the struggle for
influence inside President Vladimir Putin’s entourage.
At a meeting chaired by Putin, Economy Minister Alexei Ulyukayev sought
the president’s blessing for the central bank to give 140 billion rubles
($2.2 billion) to lenders, according to a person who was briefed on the
meeting by Nabiullina.
Banks would use the extra money, Ulyukayev argued as he sat before
Nabiullina in a Kremlin conference room, to lend to companies suffering
amid Russia’s economic downturn. Some of Putin’s friends in the business
world would benefit too.
Nabiullina objected, saying that releasing money would drive up
inflation and undermine her monetary policies.
Putin, sitting at the head of a hardwood table, backed the central
banker.
"The trust in her from Putin and (Prime Minister Dmitry) Medvedev is
quite high,” Alexei Kudrin, who was finance minister until 2011 and is
still influential in Kremlin circles, said in an interview.
Nabiullina’s ability to hold the line – often drawing Putin to her side
against other close associates – reflects deep ideological and personal
rifts emerging at the Kremlin amid an economic downturn caused by
falling oil prices and Western sanctions.
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Putin’s inner circle is dividing into two broad camps: On the one side
are associates – many of whom have security backgrounds like Putin – who
want a strong Russian state with military muscle and control over
strategic economic sectors.
On the other side are Nabiullina and her allies who believe in economic
openness.
Over the past two years, the 52-year-old central banker has steered
Russia through one the deepest recessions since the end of Communism.
Nabiullina's policy of letting the rouble fall pushed up the cost of
imports, which in Russia include many basic goods. That drove consumer
price inflation last year to 12.9 percent. For most people, wages have
not risen as fast, and in some cases have even fallen.
Yet the weaker rouble, along with her policies of keeping interest rates
high, curbing inflation and limiting cheap money to banks, has staved
off an economic meltdown, experts say.
In pursuing her strategy, she has also survived protests from powerful
Putin associates, according to more than a dozen people at the central
bank, government and close to the government.
One of the biggest opponents of her agenda, for example, is Igor Sechin,
head of Russia's biggest oil company, Rosneft, and a strong ally of
Putin’s. Sergei Glazyev, the man Putin has appointed as an economic
advisor, is also an open critic of the central banker’s policies.
A former spy of the KGB secret services, Putin’s 15 years in power have
been marked by the nationalization of private business and an aggressive
foreign policy that has hurt Russia Inc. worldwide. By siding with
Nabiullina, Putin is also making macro-economic stability a priority.
The Russian central bank and the economy ministry declined to comment on
the March meeting. Nabiullina, through the central bank, declined to be
interviewed for this story.
Putin's spokesman, Dmitry Peskov, said in reply to Reuters questions
that the central bank was independent and the Kremlin never sought to
influence it.
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But he said: "As a whole, the president supports the macro-economic
policy of the central bank ... As a whole, he does indeed rate highly
Nabiullina's professional qualities and professionalism." He said Putin
regards macro-economic stability as an absolute priority.
That the head of Russia’s central bank would have the support of the
president is, to a certain extent, understandable; Putin picked her.
Nabiullina herself has important backers, including the head of Russia’s
biggest commercial bank.
There have been missteps too: Several of her ideological opponents, and
one person close to the central bank, said the bank did not act quickly
enough to reassure markets when the rouble took a sharp plunge in
December 2014. Nabiullina at the time said it would have been futile to
hold back global market forces.
Yet there are signs that Nabiullina’s influence is increasing beyond
that of her predecessors.
For example, the central bank recently began drafting memos for middle
ranking government and Kremlin officials on how to speak in public about
the currency, according to two sources close to the central bank.
The guidance, which no previous central banker has issued in such a
wide-ranging way, came in the wake of a long bout of rouble volatility
on currency markets.
INFLUENTIAL BACKERS
Among Nabiullina’s original backers for the central bank post in 2013
was German Gref, chief executive of Sberbank, Russia's biggest bank,
according to the people who spoke to Reuters.
Gref served as economy minister from 2002-2007, and Nabiullina served as
his deputy before replacing him in the job.
Gref is a Putin loyalist who can exercise indirect influence over
policy, but he is not part of the Putin inner circle. Gref did not reply
to an email seeking comment.
Nabiullina also had other connections. Her husband, Yaroslav Kouzminov,
is rector at the Higher School of Economics, Russia's most influential
economic university. The couple are part of a wide network of friends
maintained by Vyacheslav Volodin, first deputy chief of the Kremlin
staff who is poised to become next speaker of parliament, people who
know the couple said.
People who have worked with Nabiullina said she has a low-key management
style. She does not publicly discuss politics or other issues beyond the
realm of her central-banking responsibilities.
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![](../images/092616pics/busine27.jpg)
Russian Central Bank Governor Elvira Nabiullina speaks during a news
conference in Moscow, Russia September 16, 2016. REUTERS/Maxim
Zmeyev
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Russia
was tipped into economic crisis shortly into Nabiullina’s term as governor. In
2014 when world prices for oil, Russia’s main source of revenue, plummeted. At
the same time, the conflict over Ukraine provoked western sanctions and an
investor stampede out of Russian assets.
Nabiullina had to quickly make a series of decisions that would define her
governorship.
The first was her decision, when downward pressure on the rouble became intense,
to drop the policy of trying to keep the rouble within a corridor. After that,
the currency became extremely volatile, falling to an all-time low of close to
86 per dollar in early 2016, from around 35 to the dollar when the Ukraine
crisis escalated in early 2014.
That caused pain for ordinary Russians, whose savings in dollar terms were wiped
out and for whom the price of imported goods in the shops shot up. Companies
with foreign currency debt were in trouble.
"The
brightest example of her independence is that she insisted on the floating
rouble regime," said Kudrin.
Letting the rouble float protected the bank's gold and foreign exchange
reserves, which would otherwise have had to be spent to defend the currency.
Exporters, especially oil firms, benefited; because their revenues were in hard
currency, their earnings, in rouble terms, grew.
But the floating rouble also brought high inflation, and that required another
watershed decision.
On the night of Dec. 15, 2014, with panic mounting on the domestic foreign
exchange market, the central bank announced it would hike the key interest rate
by 650 basis points to 17 percent. Banks were threatened with major losses,
because their clients would struggle to make repayments at the new rate.
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Andrei Kostin, chief executive of VTB, Russia's second biggest bank, and a
powerful Putin ally, said big lenders went to the Kremlin and the government to
ask for measures to mitigate their losses.
Kostin's office wall is decorated with multiple photographs of him in Putin's
company.
"We were told: 'We will stick to the central bank's policy; money will be
expensive, and we will not take measures which would lead to banks increasing
their profitability,” Kostin recalled in an interview with Reuters in June.
“We will help with the capital – you will take on losses'."
GROWTH LOBBY
Nabiullina's policies have made her enemies within the Putin entourage.
Ulyukayev, the economy minister, has often clashed with Nabiullina, said sources
close to the government and the central bank.
In February last year, Nabiullina publicly chided the Rosneft state oil giant --
whose head Sechin is a strong Putin ally and a man few dare openly oppose.
The
central bank chief said Rosneft’s need to finance its large foreign debt was
creating market expectations that Rosneft would sell rubles. That, in turn, was
pushing down the currency. In an unusual move, Sechin went to visit Nabiullina,
according to two people with knowledge of the meeting.
The sources said they did not know what was discussed. But since early 2015,
Rosneft stopped issuing rouble bonds to refinance its debt. “One doesn’t want to
be accused of manipulating the national currency,” said one of the people.
Rosneft did not respond to Reuters questions.
Glazyev, the Putin adviser who has been asked, along with others, to come up
with ideas for a new economic policy for Russia, also has radically different
views from Nabiullina.
Glazyev's ideas include capital controls, a ban on U.S. dollar usage in Russia
and printing money to revive economic growth. Glazyev declined an interview
request.
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Another person involved in generating ideas for a new policy is Boris Titov,
head of a small political party called "Growth." He too criticizes Nabiullina’s
policies, saying that her tight monetary policy is choking economic recovery.
"You cannot wait when in crisis...cash should be provided.”
Natalia Burykina, former head of the financial committee in parliament, has also
clashed with Nabiullina over banking supervision. Burykina left the committee
last year after what some said was a clash with Nabiullina.
Burykina denied that she had been pushed out. She said there was a clear reason
for Nabiullina’s influence:
"Support from the president of Russia."
(additional reporting by Darya Korsunskaya, Oksana Kobzeva, Lidia Kelly, Polina
Devitt, Denis Pinchuk, Kira Zavyalova and Maria Tsvetkova; editing by Alessandra
Galloni and Louise Heavens)
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