Russia’s Inflation and Currency Woes: Discord between Kremlin and Central Bank

Russia’s central bank takes emergency measures to stabilize currency

In recent weeks, Russia has been grappling with rising inflation and a plunging currency, leading to a growing disagreement between the Kremlin and the country’s central bank. In response, the Central Bank of Russia (CBR) raised interest rates by 350 basis points to 12% during an emergency meeting held on Tuesday. This move was an attempt to halt the rapid depreciation of the ruble, which reached a 17-month low of nearly 102 to the dollar on Monday.

The central bank’s decision followed an op-ed by President Vladimir Putin’s economic advisor, Maxim Oreshkin, who argued that loose monetary policy was to blame for the inflation and currency troubles. Oreshkin claimed that the central bank had the necessary tools to rectify the situation.

The CBR justified its emergency rate hike by stating that it aimed to limit price stability risks in the face of mounting inflationary pressure. Over the past three months, inflation has averaged at an annualized 7.6% on a seasonally adjusted basis, while core inflation has risen to 7.1% over the same period.

The bank’s board explained that the steady growth in domestic demand, surpassing the capacity for output expansion, has contributed to underlying inflationary pressure and increased demand for imports, affecting the ruble’s exchange rate dynamics.

Prior to the intervention by the Kremlin, the Bank of Russia had attributed the inflation and currency woes to the country’s shrinking balance of trade. From January to July, Russia’s current account surplus had dropped over 85% year-on-year.

Analysts have suggested that the government’s intervention in monetary policy is indicative of the economic challenges facing the country. Agathe Demarais, the global forecasting director at the Economist Intelligence Unit, supported the central bank’s earlier assessment, stating that the collapse in Russia’s current account surplus was a key factor driving high inflation.

Demarais explained that Western sanctions were curbing Russia’s export revenues from hydrocarbon sales and increasing import costs, exacerbating the vicious circle the ruble finds itself in.

Capital controls as a potential solution

As a potential solution, Russian authorities are reportedly considering the reintroduction of capital controls, specifically requiring exporters to sell their foreign currency revenues. The central bank’s rate hike has only slowed down the ruble’s deterioration.

Stephanie Kennedy, an economist at Julius Baer, expects the central bank to intensify capital controls and enforce rules that mandate the exchange of export earnings from US dollars into rubles. She noted that Russia’s isolation from the international financial system due to sanctions and capital controls had restricted trading in the ruble.

Despite this, Kennedy believes that the current account surplus, though significantly reduced, remains within a tolerable range. She stated that a cheap currency boosts the ruble value of Russia’s oil revenues while increasing import costs.

While Julius Baer expects the ruble to appreciate slightly against the dollar in the next three to twelve months, the currency remains largely untradeable due to its limited liquidity and uncertainty surrounding the situation.