Putin’s right-hand woman

ELVIRA NABIULLINA’S first encounter with capitalism came during her university days, when she enrolled in a course called “Critique of Western Economic Theory”. It was an unusual start for a modern central banker. These days she embodies another contradiction. Russia’s economy has been held back for years by corruption and rent-seeking, and more recently by Western sanctions and the low price of oil and gas, the country’s main exports. Yet the Central Bank of Russia (CBR) is a model of competent, technocratic policymaking. Since Ms Nabiullina became governor in 2013, the CBR has kept Russia’s economy, awful though it is, out of worse trouble.

The soft-spoken Ms Nabiullina has humble roots. Her mother worked in a factory; her father was a chauffeur. For years she has been at the centre of Russia’s turbulent transition to a market economy. When Vladimir Putin became president in 2000, he proclaimed a break with the chaos of the 1990s. But when it came to economics “Putin didn’t have clear ideas,” says Yevgeny Yasin, a former economy minister. He thus entrusted economic policy to a cadre of professionals with orthodox views, including Ms Nabiullina, who became deputy economy minister in 2000 and minister in 2007, an experience she calls “the most influential” on her approach to economics.

The crisis of 2008-09, when oil prices fell and the world economy stagnated, revealed that the Russian economy was dependent on flighty foreign hedge funds and retail investors. As they pulled money out, the CBR tried to prop up the value of the rouble, losing over $200 billion of foreign-exchange reserves in a matter of months (see chart). Lending shrivelled across the economy. In 2009 GDP shrank by 8%.

That prompted Russia to enact two sets of reforms, in preparation for the inevitable next oil-price crash. First, it diversified its sources of funding. In 2013, for instance, Russian regulators made it possible for Euroclear and Clearstream, two international securities depositories, to begin handling certain Russian bonds. That helped to attract institutional investors, who tend to shrug off market gyrations and like to buy assets when they are cheap, says Jan Dehn of Ashmore, a fund manager.

On Ms Nabiullina’s watch Russia’s domestic investment market, another source of stable funding, has also deepened. The share of Russia’s public debt in domestic hands rose from 66% to 70% in 2013 alone. Goldman Sachs, a bank, reckons that the assets of Russian pension funds, which are regulated by the CBR, will increase from about $60 billion today to about $200 billion by 2020.

This diversification of funding, Mr Dehn says, has left the Russian economy less starved of capital than it would otherwise have been. Relative to the size of the economy, private-sector capital flight was smaller in 2014-15 than in 2008-09. In 2015 GDP shrank by 4%, a better performance than in 2008-09, despite a bigger drop in the oil price.

The second big change in policy since 2008-09 concerns Russia’s international reserves. They grew by $140 billion in 2009-13 to more than $500 billion (about a fifth of Russian GDP), thanks to high oil prices. This big cushion is one reason why Russia has been able to pursue an aggressive, anti-Western foreign policy, since it has not needed to turn to the IMF for a bail-out, as it did in 1998. Ultimately that will not work to Russians’ advantage. But it also gave Ms Nabiullina room for manoeuvre.

To maintain reserves when the oil price began to fall, Ms Nabiullina accelerated a plan to allow the rouble to float. It fell by 40% against the dollar in 2015 alone. Propping up the rouble would have been popular, since it would have preserved ordinary Russians’ purchasing power, but it would have meant burning through the country’s reserves again. Instead the CBR channelled dollars to sanction-hit banks and energy companies, to help them repay external debt. Reserves have also been used to finance the budget deficit. As oil prices recover, so the CBR is again accumulating reserves, with a view to hitting the $500 billion mark once again.

The rouble’s fall has stoked inflation, as imports have become more expensive. As a result, real (ie, adjusted for inflation) wages have fallen by more than 10% since 2014. (They are still triple what they were when Mr Putin took office in 2000.) Interest rates, which in 2014 were jacked up to 17%, have been the only tool the CBR has used to stem the rouble’s fall. High rates also help to bring down inflation, currently 7%, towards the CBR’s target of 4%. These decisions have “reflected the capacity of the institution to do what is right for the country regardless of the political situation”, says Birgit Hansl of the World Bank.

Such steps have been “painful, but necessary”, in Ms Nabiullina’s words. To ease the pain, the government is spending 3% of GDP recapitalising well-managed banks and compensating Russians with savings in bad ones. In addition, banks were temporarily allowed to revalue foreign-exchange liabilities at a pre-crisis exchange rate, making their balance-sheets seem healthier than they really were, and thus allowing them to lend more. The CBR also allowed banks to offer forbearance on souring debts, a move cautiously welcomed by the IMF. All these measures may be paying off: non-performing loans remain at a lower level than in 2008-09. Credit is inching up.

At the same time Ms Nabiullina has tightened supervision. “She received carte blanche from the president to go after those banks that were earlier untouchable,” says Oleg Vyugin, chairman of MDM Bank and a former deputy governor of the central bank. About 200 banking licences have been rescinded since 2014, roughly one-fifth of the total.

Nonetheless, the long-term economic outlook is poor. Ms Nabiullina’s critics say the CBR’s tight monetary policy is the culprit, since it cripples investment. But corporate profits rose by 50% last year as the rouble value of foreign earnings jumped; companies have plenty of cash to invest. In regular surveys, manufacturers cite policy uncertainty, not high interest rates, as a big constraint. Ms Nabiullina agrees. “Our economic downturn is mostly the result of structural factors,” she says. What worries her most is not protracted low oil prices, but “how quickly and dynamically” Russia can improve its business environment. Until then, the CBR will have an outsize role in keeping the Russian economy going.