The Russian economy has surprisingly withstood the extreme pain from western sanctions, largely thanks to its energy exports but as this article suggests, also credit to the technocrats who stayed back to run the economy despite opposing the war. The article also seems to credit Vladmir Putin for having backed these technocrats despite their position on the war. The author begins by talking about a presentation made by a bunch of technocrats to Putin a month before the invasion on the implications of potential western sanctions for the Russian economy.
“Putin listened as Herman Gref, chief executive of state-owned lender Sberbank, led a 39-page presentation warning the Russian president of disastrous consequences if tensions over Ukraine, then already at fever pitch, were to escalate further still. A close ally of Putin’s since their days in the St Petersburg mayor’s office in the 1990s, Gref had a reputation for being the most liberal member of Putin’s extended circle — and for speaking his mind.
The presentation warned Putin that “harsh sanctions” would create panic on financial markets and potentially set Russia’s economy back decades. Gross domestic product could fall by 30 per cent in dollar terms in two years. Inflation would force the central bank to raise interest rates to 35 per cent, cutting real incomes by a fifth. Russians’ quality of life would lag behind even developing countries as restrictions on imports would make Russia struggle not only to find advanced technologies, but essentials such as medicines and food.”
But to no avail as Putin still went ahead with the invasion.
“…as western countries cut Russia out of global financial markets and supply chains, the technocrats rode to the Kremlin’s rescue, deploying deft economic management skills to defuse the crisis. In the process, they have ensured that their own apocalyptic predictions did not come to pass.
Within the narrow confines of the Russian political elite, technocrats such as Gref and Nabiullina were once thought of as modernisers, a reformist counterbalance to the siloviki, the hardline security services veterans at Putin’s other shoulder. However, when faced with a historic chance to defend their belief in open markets and speak out against the war, they demurred. Instead of breaking with Putin, the technocrats have cemented their role as his enablers, using their expertise and tools to soften the blow of western sanctions and hold Russia’s wartime economy together, according to former officials.”
The article specifically looks at the role of Russia’s central bank governor Elvira Nabiullina.
“In almost a decade at the helm of Russia’s central bank, Nabiullina carefully cultivated a reputation as the Kremlin’s top technocrat. She steered Russia out of its 2014 economic crisis, tamed inflation through ultra-hawkish monetary policy and took on powerful vested interests in the notoriously corrupt banking sector. Her success earned her the trust of Putin, who backed her independence in the face of a powerful oligarchical lobby that pushed for Sergei Glazyev, a hardline nationalist and promoter of conspiracy theories who is beloved of the siloviki, to replace her. In December last year, Putin publicly endorsed Nabiullina over her critics, warning that Russia “could end up like Turkey” — a byword for unorthodox economic policy and a rapidly weakening currency — if it abandoned inflation targeting to open up cheaper credit for businesses.
….As tensions with the west over Ukraine grew, especially after the 2014 annexation of Crimea, Nabiullina moved to insulate Russia from sanctions by developing an independent payments system and amassing a $643bn war chest for foreign exchange reserves.
Nabiullina quickly set about dismantling her own legacy. Western countries seized about half of Russia’s foreign currency reserves, leaving Nabiullina unable to use a tool that was supposed to protect the economy from turbulence. To stop a run on the banks and ease pressure on the rouble, Russia introduced currency controls — a measure she had previously told friends would force her resignation. “We destroyed everything we built over 10 years,” a person close to her says.
…Nabiullina’s failure to anticipate the freeze on the reserves made her a target for pressure from leading siloviki who pushed for a figure like Glazyev to replace her in the spring, according to a current and a former Russian official. But Putin, evidently confident in her ability to steer Russia out of the storm, instead appointed her to a third term.
Nabiullina publicly pleaded for central bank staff to band together to help ordinary Russians survive the war’s financial shocks — which she sees as the crucial part of her mission, according to people close to her. But many of them decided they could no longer go along with it. Prokopenko, whose parents are Ukrainian, resigned from her job advising Yudayeva in the first few weeks of the war and left Russia. Though several junior and mid-career officials quietly quit the central bank and Russia’s economic ministries, almost all of Russia’s senior technocrats still remain in their posts. “They had to resign, morally. But she feels she is doing her job,” a sanctioned Russian oligarch says of Nabiullina.
By late spring, the panic had largely subsided. The payments systems the central bank spent years developing allowed domestic transfers to flow freely even as the sanctions largely cut Russia from the outside world. High energy prices permitted Russia to grow its budget revenue — half of which comes from oil and gas — by 34 per cent year on year from January to April and helped the rouble recover from its precipitous fall against the dollar.
This was not all down to the actions of the technocrats, however. While Russia’s dollar income from energy sales grew, the sanctions made it much more difficult for Russia to buy imports, leading to the economy running a substantial trade surplus. That eased pressure on the rouble, allowing Nabiullina to relax the currency controls and begin cutting interest rates. “The central bank reduced the panic in the first day,” says Sergei Guriev, provost and professor of economics at Sciences Po university in Paris. But “the central bank is backed by riot police”, Guriev adds. “If you asked me a year ago what would happen if the government announces you can’t take your money out of the bank, I would say there would be a mass protest. But in this particular case, citizens understood that if they protest, they would go to jail or be beaten up.””
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
