How Russia's central bank chief held the line

MOSCOW (Reuters) - One Thursday evening in March, Elvira Nabiullina, governor of Russia’s central bank, faced down a rival in the struggle for influence inside President Vladimir Putin’s entourage.

Presidential aide Elvira Nabiullina (R) shakes hands with Russia's President Vladimir Putin during a meeting on issues of fuel and energy at the Novo-Ogaryovo state residence outside Moscow, Russia, February 13, 2013. REUTERS/Sergei Karpukhin/File Photo

At a meeting chaired by Putin, Economy Minister Alexei Ulyukayev sought the president’s blessing for the central bank to give 140 billion rubles ($2.2 billion) to lenders, according to a person who was briefed on the meeting by Nabiullina.

Banks would use the extra money, Ulyukayev argued as he sat before Nabiullina in a Kremlin conference room, to lend to companies suffering amid Russia’s economic downturn. Some of Putin’s friends in the business world would benefit too.

Nabiullina objected, saying that releasing money would drive up inflation and undermine her monetary policies.

Putin, sitting at the head of a hardwood table, backed the central banker.

“The trust in her from Putin and (Prime Minister Dmitry) Medvedev is quite high,” Alexei Kudrin, who was finance minister until 2011 and is still influential in Kremlin circles, said in an interview.

Nabiullina’s ability to hold the line – often drawing Putin to her side against other close associates – reflects deep ideological and personal rifts emerging at the Kremlin amid an economic downturn caused by falling oil prices and Western sanctions.

Putin’s inner circle is dividing into two broad camps: On the one side are associates – many of whom have security backgrounds like Putin – who want a strong Russian state with military muscle and control over strategic economic sectors.

On the other side are Nabiullina and her allies who believe in economic openness.

Over the past two years, the 52-year-old central banker has steered Russia through one the deepest recessions since the end of Communism.

Nabiullina’s policy of letting the rouble fall pushed up the cost of imports, which in Russia include many basic goods. That drove consumer price inflation last year to 12.9 percent. For most people, wages have not risen as fast, and in some cases have even fallen.

Yet the weaker rouble, along with her policies of keeping interest rates high, curbing inflation and limiting cheap money to banks, has staved off an economic meltdown, experts say.

In pursuing her strategy, she has also survived protests from powerful Putin associates, according to more than a dozen people at the central bank, government and close to the government.

One of the biggest opponents of her agenda, for example, is Igor Sechin, head of Russia’s biggest oil company, Rosneft, and a strong ally of Putin’s. Sergei Glazyev, the man Putin has appointed as an economic advisor, is also an open critic of the central banker’s policies.

A former spy of the KGB secret services, Putin’s 15 years in power have been marked by the nationalization of private business and an aggressive foreign policy that has hurt Russia Inc. worldwide. By siding with Nabiullina, Putin is also making macro-economic stability a priority.

The Russian central bank and the economy ministry declined to comment on the March meeting. Nabiullina, through the central bank, declined to be interviewed for this story.

Putin’s spokesman, Dmitry Peskov, said in reply to Reuters questions that the central bank was independent and the Kremlin never sought to influence it.

But he said: “As a whole, the president supports the macro-economic policy of the central bank ... As a whole, he does indeed rate highly Nabiullina’s professional qualities and professionalism.” He said Putin regards macro-economic stability as an absolute priority.

That the head of Russia’s central bank would have the support of the president is, to a certain extent, understandable; Putin picked her. Nabiullina herself has important backers, including the head of Russia’s biggest commercial bank.

Slideshow ( 2 images )

There have been missteps too: Several of her ideological opponents, and one person close to the central bank, said the bank did not act quickly enough to reassure markets when the rouble took a sharp plunge in December 2014. Nabiullina at the time said it would have been futile to hold back global market forces.

Yet there are signs that Nabiullina’s influence is increasing beyond that of her predecessors.

For example, the central bank recently began drafting memos for middle ranking government and Kremlin officials on how to speak in public about the currency, according to two sources close to the central bank.

The guidance, which no previous central banker has issued in such a wide-ranging way, came in the wake of a long bout of rouble volatility on currency markets.


Among Nabiullina’s original backers for the central bank post in 2013 was German Gref, chief executive of Sberbank, Russia’s biggest bank, according to the people who spoke to Reuters.

Gref served as economy minister from 2002-2007, and Nabiullina served as his deputy before replacing him in the job.

Gref is a Putin loyalist who can exercise indirect influence over policy, but he is not part of the Putin inner circle. Gref did not reply to an email seeking comment.

Nabiullina also had other connections. Her husband, Yaroslav Kouzminov, is rector at the Higher School of Economics, Russia’s most influential economic university. The couple are part of a wide network of friends maintained by Vyacheslav Volodin, first deputy chief of the Kremlin staff who is poised to become next speaker of parliament, people who know the couple said.

People who have worked with Nabiullina said she has a low-key management style. She does not publicly discuss politics or other issues beyond the realm of her central-banking responsibilities.

Russia was tipped into economic crisis shortly into Nabiullina’s term as governor. In 2014 when world prices for oil, Russia’s main source of revenue, plummeted. At the same time, the conflict over Ukraine provoked western sanctions and an investor stampede out of Russian assets.

Nabiullina had to quickly make a series of decisions that would define her governorship.

The first was her decision, when downward pressure on the rouble became intense, to drop the policy of trying to keep the rouble within a corridor. After that, the currency became extremely volatile, falling to an all-time low of close to 86 per dollar in early 2016, from around 35 to the dollar when the Ukraine crisis escalated in early 2014.

That caused pain for ordinary Russians, whose savings in dollar terms were wiped out and for whom the price of imported goods in the shops shot up. Companies with foreign currency debt were in trouble.

“The brightest example of her independence is that she insisted on the floating rouble regime,” said Kudrin.

Letting the rouble float protected the bank’s gold and foreign exchange reserves, which would otherwise have had to be spent to defend the currency. Exporters, especially oil firms, benefited; because their revenues were in hard currency, their earnings, in rouble terms, grew.

But the floating rouble also brought high inflation, and that required another watershed decision.

On the night of Dec. 15, 2014, with panic mounting on the domestic foreign exchange market, the central bank announced it would hike the key interest rate by 650 basis points to 17 percent. Banks were threatened with major losses, because their clients would struggle to make repayments at the new rate.

Andrei Kostin, chief executive of VTB, Russia’s second biggest bank, and a powerful Putin ally, said big lenders went to the Kremlin and the government to ask for measures to mitigate their losses.

Kostin’s office wall is decorated with multiple photographs of him in Putin’s company.

“We were told: ‘We will stick to the central bank’s policy; money will be expensive, and we will not take measures which would lead to banks increasing their profitability,” Kostin recalled in an interview with Reuters in June.

“We will help with the capital – you will take on losses’.”


Nabiullina’s policies have made her enemies within the Putin entourage.

Ulyukayev, the economy minister, has often clashed with Nabiullina, said sources close to the government and the central bank.

In February last year, Nabiullina publicly chided the Rosneft state oil giant -- whose head Sechin is a strong Putin ally and a man few dare openly oppose.

The central bank chief said Rosneft’s need to finance its large foreign debt was creating market expectations that Rosneft would sell rubles. That, in turn, was pushing down the currency. In an unusual move, Sechin went to visit Nabiullina, according to two people with knowledge of the meeting.

The sources said they did not know what was discussed. But since early 2015, Rosneft stopped issuing rouble bonds to refinance its debt. “One doesn’t want to be accused of manipulating the national currency,” said one of the people. Rosneft did not respond to Reuters questions.

Glazyev, the Putin adviser who has been asked, along with others, to come up with ideas for a new economic policy for Russia, also has radically different views from Nabiullina.

Glazyev’s ideas include capital controls, a ban on U.S. dollar usage in Russia and printing money to revive economic growth. Glazyev declined an interview request.

Another person involved in generating ideas for a new policy is Boris Titov, head of a small political party called “Growth.” He too criticizes Nabiullina’s policies, saying that her tight monetary policy is choking economic recovery. “You cannot wait when in should be provided.”

Natalia Burykina, former head of the financial committee in parliament, has also clashed with Nabiullina over banking supervision. Burykina left the committee last year after what some said was a clash with Nabiullina.

Burykina denied that she had been pushed out. She said there was a clear reason for Nabiullina’s influence:

“Support from the president of Russia.”

additional reporting by Darya Korsunskaya, Oksana Kobzeva, Lidia Kelly, Polina Devitt, Denis Pinchuk, Kira Zavyalova and Maria Tsvetkova; editing by Alessandra Galloni and Louise Heavens