The replacement of the head of the Bank of Russia will send the ruble into a tailspin, but Putin has no other options available.
The Russian business community remained silent even as Western sanctions triggered a sharp rise in real interest rates. However, in recent weeks, leaders of major companies have begun to openly criticize the head of the Central Bank of Russia, Elvira Nabiullina, who has held her position since 2013 and reportedly wanted to resign at the onset of the large-scale war in 2022.
While Nabiullina's position appears increasingly shaky, the Kremlin continues to insist that Western sanctions have only strengthened the economy, making it more self-sufficient. This claim is clearly at odds with reality, as evidenced by the repeated calls from Russian officials to the West to lift the restrictions.
Interest Rate Hikes Have Had an Adverse Effect
Since the annexation of Crimea in 2014, economic sanctions have triggered three major currency crises in Russia: in March-April 2014, February-March 2022, and July-August 2023. Each time, Nabiullina managed to mitigate their effects by raising interest rates.
However, the situation has changed. On October 25, the Bank of Russia raised the key interest rate from 19% to 21%. In its statement, the Central Bank of Russia noted that "inflation expectations continue to rise" and that the growth of domestic demand "significantly outpaces" the economy's ability to expand the supply of goods and services.
With official inflation at 9% and a real interest rate of 12%, debates about economic policy are unfolding in Russia for the first time in a long while. However, this time, the voices of genuine economists are not dominant, as most independent experts have fled the country to avoid imprisonment.
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Instead, three prominent Russian oligarchs recently spoke out against the Bank of Russia's interest rate hikes. While the open criticism from Oleg Deripaska was hardly surprising, Alexey Mordashov, who owns the metallurgical conglomerate Severstal, usually chooses his words carefully. Both Deripaska and Mordashov enjoy broad support among the Russian business elite.
At the end of October, Mordashov acknowledged that "the necessity of raising rates to limit inflation is obvious," but warned, "We are approaching a situation where the medicine may become more dangerous than the disease."
However, the real shock came when Sergey Chemezov, the CEO of the state giant in arms and technology, Rostec, during a speech in the Federation Council (the upper legislative chamber), rebuked Nabiullina, stating that further rate hikes would lead to the bankruptcy of most enterprises.
He also warned that higher interest rates could force "Rostec" to halt the export of high-tech products.
Several other well-known businessmen expressed similar concerns – marking the first time since the onset of the large-scale war in Ukraine that Vladimir Putin has faced open opposition to his economic policy.
New Influential Figures
Since 2004, Putin and his circle have amassed wealth by manipulating state contracts and systematically embezzling assets from the energy giant Gazprom. This was documented in the past by the late Boris Nemtsov and Vladimir Milov in their 2008 brochure "Putin and Gazprom".
However, European sanctions have turned what were once enormous profits for Gazprom into equally sizable losses, diminishing the financial clout of Putin's long-time allies – the "Gazprom parasites," including Mikhail and Yuri Kovalchuks and Gennady Timchenko.
As Milov recently claimed, Chemezov has become the dominant figure among Putin's business allies. Although he lacks qualifications beyond his past service in the KGB alongside Putin in Dresden, he has leveraged these connections to secure control over the Russian defense industry, which is now consolidated within Rostec.
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The latest entity, supported by federal funding (though its finances remain a state secret), controls about 80% of Russian defense production.
Chemezov is also a key beneficiary of the war in Ukraine. Recent personnel changes in the government, including the dismissal of Russian Defense Minister Sergey Shoigu, have favored Chemezov, as Shoigu can no longer afford to complain about the poor quality of Rostec's products.
Meanwhile, Chemezov's main protégé, Denis Manturov, has been promoted to the position of first deputy prime minister. Both Manturov and Alexey Dyumin – another ally of Chemezov – now hold seats on the influential Security Council.
Replacing Nabiullina
In 2013, a fierce struggle erupted within Putin's inner circle over who would lead the Central Bank: a liberal or a state loyalist.
The main contenders at that time were Alexey Kudrin, a liberal former finance minister, and Sergey Glazyev, a proponent of strict monetary policy. As Putin's economic advisor, Nabiullina led the liberals to victory, aided by the Kremlin ruler's fear of a repeat of the financial crisis of 1998, which led to the collapse of Prime Minister Sergey Kiriyenko's government.
Nabiullina's current priorities include controlling inflation, reducing capital flight, stabilizing the ruble, and supporting GDP growth. However, the economy is expected to continue growing sluggishly: forecasts predict a growth rate of 0.5-1.5% in 2025, down from the anticipated 3.6% this year.
Her trusted first deputy, Ksenia Yudaeva, was demoted in 2023 and transferred to the International Monetary Fund. At a recent BRICS summit in Kazan, Putin even made a harsh joke at Nabiullina's expense, clearly upsetting her.
The main question now is whether Putin will replace Nabiullina with an unreserved loyalist who will lower interest rates, allow inflation to soar, lead to capital flight, and send the ruble into a "knockout."
Given that the economic crisis in Russia is a direct consequence of Putin's invasion and subsequent Western sanctions, the only way to stabilize the Russian economy is to end the war and withdraw troops from Ukraine.
Copyright: Project Syndicate, 2024