Russian central bank weighs rate rises to prop up floundering rouble

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Russia’s central bank said it may increase its key interest rate after the rouble fell to less than Rbs100 to the dollar on Monday, prompting policymakers to squabble over how to deal with the economic fallout from President Vladimir Putin’s war in Ukraine.

Nearly a year and a half after Putin ordered the invasion, Russia’s technocrats are struggling to balance the competing priorities of economic growth and stabilising the currency, which is at a 16-month low against the dollar.

The rouble’s precipitous slide prompted rare public disagreements among top Russian officials on Monday as the Kremlin sought to assuage growing anxiety about the currency while continuing to praise the debt-fuelled growth that had weakened it.

Anatoly Aksakov, head of the finance committee in the Duma, told local news site Ura.ru on Monday that “businesses are overloaded and raising production levels” in his native region of Chuvashia in central Russia.

“People are getting their salaries. The [region] is living life to the fullest, everyone has a smile on their face, and there is no stress that the dollar rate is nearing 100 roubles,” he added.

But the effect has already been noticed even farther from Moscow, which has so far been insulated from most of the war’s consequences.

In Surgut, a Siberian oil town, the rolling ticker running across a local news agency’s offices was replaced with text on Sunday that said: “Putin is a dickhead and a thief. 100 roubles to the dollar — you’ve lost your fucking mind!” The news agency said the ticker had been hacked.

Maxim Oreshkin, Putin’s economic adviser, wrote an article for the state newswire Tass earlier on Monday that included thinly veiled criticism of the central bank, claiming that “a strong rouble is in the interests of the Russian economy,” which he said was otherwise recovering after a recession last year.

Oreshkin blamed the rouble’s fall on the central bank after it eased monetary policy, which he said had led to an extra Rbs12.8tn in debt-fuelled demand that was outstripping the budget deficit and overheating the economy.

“The current exchange rate has significantly deviated from fundamental levels and is expected to normalise in the near future,” Oreshkin wrote.

But the central bank, which dropped exchange-rate targeting and switched to a free float in 2014, said the rouble was under pressure from other factors including a drop in export volumes and simultaneous rising internal demand for imports amid an increase in government borrowing.

The central bank said the potential rate rises at its next scheduled meetings were required in order to stabilise inflation at its target of 4 per cent, but added that the rouble’s decline did not threaten Russia’s financial stability.

Ballooning deficits from increased military spending, a drop in export revenues, and a growing reliance on imports have all contributed to the rouble’s fall while speeding up inflation.

Inflation grew past the central bank’s target rate to 4.3 per cent in July and is expected to rise to between 5 and 6.5 per cent this year.

Though it still remains lower in Russia than in much of Europe, thanks to the country’s energy resources and early shedding of pandemic restrictions, seasonally adjusted inflation in July was at 8.5 per cent, according to Natalia Lavrova, chief economist at BCS Global Markets.

Rising inflation has pitched central bank governor Elvira Nabiullina, who has tamed previous rises with aggressive rate tightening, against her hardline critics, who have pushed for lower rates to stimulate borrowing.

“The state has essentially raised demand for imports through spending and subsidised borrowing, which fundamentally weakens the rouble,” said Alexandra Prokopenko, a former central bank official and non-resident scholar at the Carnegie Russia Eurasia Center.

She compared the response with the tale of a drunken man who searches for his lost keys under a lamppost rather than in the park, where he lost them. “Blaming the central bank is like a drunkard’s search — looking for the guilty where the light is,” she said.

Policymakers are struggling to keep Russia’s economy stable while fuelling Putin’s war machine and mitigating the impact of western sanctions, economists say.

“The rouble is gradually losing value because the current prognosis is that the war will, and Russian budget deficits [to fund it] will, go on for years to come, until Putin dies or steps down,” Konstantin Sonin, an economic professor at the University of Chicago, wrote on Twitter last week.

The central bank last week said it would stop foreign currency purchases until the end of this year to “reduce volatility”. But the effect that such steps can have on the rouble is limited because more than half of Russia’s foreign reserves are frozen under western sanctions, Sonin said.