(Bloomberg) -- Long feted as the savior of Russia’s economy in the face of sanctions over the war in Ukraine, central bank Governor Elvira Nabiullina is increasingly under attack from officials who say she’s now destroying it with record high interest rates.
Nabiullina faces rising criticism within the Russian political and business elite ahead of the bank’s final rate-setting meeting of the year on Friday. Analysts forecast that policymakers may hike the key interest rate to 23% from 21% now, and possibly as high as 24% to curb persistent high inflation.
Bankers, business chiefs and government officials with a chance to complain to President Vladimir Putin about Nabiullina are taking the opportunity, according to three people close to the Kremlin with knowledge of the matter, asking not to be identified because the issue is sensitive. Even Prime Minister Mikhail Mishustin told Putin that the central bank’s actions were hampering the government’s efforts to support the sanctioned economy, two people said.
So far, there are no signs Putin is considering replacing Nabiullina, and he remains confident she’s taking necessary decisions to support the economy, said three people close to the Kremlin.
Putin’s spokesman, Dmitry Peskov, didn’t immediately respond to a request to comment.
Nabiullina, 61, is in a stand-off with powerful critics of her monetary policy, after the central bank said it would raise the cost of borrowing to whatever level is needed to bring inflation back to the 4% target next year. With the government spending massively on the military and to shield businesses from sanctions, the bank has hiked the rate sharply from 16% since July.
Annual inflation rose to 8.88% in November, from 8.54% the previous month, Federal Statistics Service data showed.
At his televised annual news conference and call-in show on Thursday, Putin said he hoped the bank’s rate decision would be “balanced” and take into account current “demands.” While he’d met with Nabiullina the day before, he didn’t know what the central bank would decide on Friday, he said.
Political attacks on the governor burst into the open on Wednesday when Sergei Mironov, leader of the socialist A Just Russia-Patriots-For Truth party, accused the central bank of making inflation worse by hiking the rate. “Hey, Ms. Nabiullina, do you know what you’re doing or not?” Mironov told a news conference.
The longserving Bank of Russia chief has weathered multiple economic storms since the president appointed her in June 2013, including a run on the ruble when Putin annexed Crimea in 2014. Nabiullina was instrumental in helping Russia’s economy defy predictions of a collapse and adapt to sweeping sanctions imposed by the US and its allies after the February 2022 full-scale invasion of Ukraine.
Days after Putin ordered troops into Ukraine, the central bank more than doubled the key rate to 20% at an emergency meeting to defend the currency that had slumped to around 120 per dollar, then quickly began easing.
Members of the Russian Union of Industrialists and Entrepreneurs, the main lobby group for big business, say the current record rates are forcing them to postpone investment projects. Alexey Mordashov, the billionaire owner of steelmaker Severstal, suggested initiating a discussion on “the nature of inflation” and the influence of the central bank’s rate policy, at a business forum in St. Petersburg last month.
Herman Gref, the head of state-owned Sberbank, Russia’s biggest lender, weighed in, urging the central bank “not to overdo the situation” amid risks of stagflation. Putin replaced Gref with Nabiullina as Economy Minister in 2007.
A think tank headed by the brother of Defense Minister Andrey Belousov argued in a report this month that increases in interest rates present a greater threat of bankruptcy for companies than spiraling wages amid a deepening labor shortage.
Finance Minister Anton Siluanov, long an ally of Nabiullina in aligning budget policy with monetary actions during the war, has also distanced himself. The ministry is focused on financing “any needs to ensure success at the front,” Siluanov said in an interview with RBC media in October.
Russia’s richest man, Vladimir Potanin, is among a few willing to defend Nabiullina in public. While high interest rates are uncomfortable, business must “be patient,” he told RBC.
Even as the war piles pressure on Russia’s overheating economy, neither Nabiullina nor her opponents can risk pointing that out, for fear of being accused of criticizing Putin’s leadership.
Nabiullina made no reference to the invasion as she reeled off challenges facing the bank in a lengthy defense of her monetary policy to State Duma lawmakers last month.
The central bank is being targeted because it’s forbidden to blame the war for the country’s economic difficulties, said Oleg Vyugin, a former top Bank of Russia official who’s known Nabiullina for more than 20 years.
“Everyone understands the reason for this situation,” Vyugin said. “But they also understand that there are political tasks that are more important than the central bank rate.”
Nabiullina has to respond to higher state spending by raising rates to fight inflation, according to former central bank Governor Sergey Dubinin. “The central bank operates in the existing political reality,” he said.
What Bloomberg Economics Says...
“It’s possible to understand the pushback against the central bank’s policy, but there’s hardly an alternative: President Putin needs consumers to scale back their expectations as export revenue stagnates.” — Alex Isakov, Russia economist
The governor’s walking a fine line. Tightening monetary policy may tip the economy into recession and increase bankruptcies among businesses that can no longer service their debts. Easing rates would undermine the bank’s credibility in taming inflation and trigger a slide in the ruble, which has weakened past 100 per dollar again.
Doing nothing risks stagflation, the combination of slowing growth and accelerating prices that Nabiullina has flagged as a danger in recent months.
The economy is indeed slowing. While Russia’s Economy Ministry sees gross domestic product expanding by nearly 4% in 2024, it expects growth of 2.5% next year. The International Monetary Fund in October downgraded its forecast for Russian GDP growth to 1.3% in 2025, from 1.5% earlier.
Powerful allies of Putin are among those voicing discontent.
Sergey Chemezov, head of the Rostec state defense-industry conglomerate, complained in October that the high cost of money may force it to halt exports, and risks pushing “almost the majority of our enterprises” into bankruptcy, according to the Interfax news service.
Igor Sechin, head of Russia’s largest oil company, Rosneft, warned last month that rate increases were impacting modernization at refineries. Sechin, like Chemezov, has ties stretching back decades to Putin, a former KGB agent.
“There are critics, many of them” of the central bank’s rate increases, Putin acknowledged at the annual Russia Calling! investment forum in Moscow this month. The situation requires “cooperation and collaboration” between the government and the regulator, he said.
“I see my role in directing them to work together,” Putin said.
(Updates with Putin’s comment in the eighth paragraph.)
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