The woman who pilots Russia’s war economy

For the second time in less than a decade, Elvira Nabiullina is leading Russia’s economy through treacherous waters.

In 2014, facing a ruble collapse and high inflation after just a year as head of Russia’s Central Bank, Nabiullina forced the institution into the modern era of economic policy by sharply raising interest rates. The politically risky move slowed the economy, contained the rise in prices and earned her an international reputation as a strong decision maker.

In the world of central bankers, among the technocrats charged with keeping prices in check and financial systems stable, Nabiullina has become a rising star for using orthodox policies to run an unruly economy, often tied to the price of oil.

In 2015, she was named Central Bank Governor of the Year by Euromoney magazine. Three years later, Christine Lagarde, then head of the International Monetary Fund, said that Nabiullina could make the “central bank sing”.

Now it’s up to Nabiullina to steer Russia’s economy through a deep recession and keep its financial system intact, isolated from much of the rest of the world. The challenge follows years she spent strengthening Russia’s financial defenses against the kind of powerful sanctions that were applied in response to President Vladimir Putin’s geopolitical aggression.

She guided the extraordinary recovery of the Russian currency, which lost a quarter of its value days after the February 24 invasion of Ukraine. The central bank has taken aggressive steps to prevent large volumes of money from leaving the country, halting panic in markets and a possible run on the banking system.

In late April, the Russian parliament confirmed Nabiullina, 58, for another five years as president after Putin nominated her for a third term.

“It is an important beacon of stability for Russia’s financial system,” said Elina Ribakova, deputy chief economist at the Institute of International Finance, an industry group in Washington. “Your reappointment has symbolic value.”

difficult medicine

In her latest crisis, she turned a catastrophe into an opportunity. In 2014, Russia was rocked by two economic shocks: a collapse in oil prices – caused by a surge in production in the United States and Saudi Arabia’s refusal to cut production, hurting Russia’s oil revenue – and the imposition of of economic sanctions after Russia annexed Crimea.

The ruble plummeted. Nabiullina abandoned traditional policies — such as spending large amounts of foreign exchange reserves to support the exchange rate — and shifted the bank’s focus to managing inflation. It raised interest rates to 17%, and they remained relatively high for years.

It was a painful readjustment, and the economy shrank for a year and a half. But in mid-2017 it achieved something that had seemed unlikely just a few years earlier: the inflation rate had dropped to less than 4%, the lowest in the country’s post-Soviet era.

“She has been the very model of a modern central banker,” said Richard Portes, an economics professor at the London Business School who has participated in debates with Nabiullina at conferences.

“She was doing what she had to do,” he said, even when it was politically difficult. “If you want a demonstration of the alternative,” Portes added, “just look at Turkey,” where years of political interference at the central bank have allowed inflation to spiral out of control, reaching 70% this month.

Under Nabiullina’s direction, the Central Bank continued its modernization efforts. He improved his communication by scheduling key policy decisions, providing policy advice, meeting with analysts and giving press interviews. Russia’s Central Bank has come to be regarded as the country’s main economic brain, attracting respected private sector economists.

cleaning the banks

In addition to his track record in monetary policy, Nabiullina has received praise for carrying out a thorough cleaning of the banking sector. In her first five years at the bank, she revoked some 400 banking licenses — essentially closing a third of Russia’s banks — in an effort to weed out weak institutions that engaged in what she called “dubious transactions.”

It was considered a courageous crusade: in 2006, a Central Bank official who had started a vigorous campaign to close down banks suspected of money laundering was murdered.

“Fighting corruption in the banking sector is a job for very brave people,” said Sergei Guriev, a Russian economist who left the country in 2013 and is now a professor at Sciences Po in Paris. He called his program flawed, however, because it was largely limited to private banks. This created a moral hazard problem that left state-owned banks feeling comfortable taking a lot of risk with government protection, he said.

building a fortress

Nabiullina has been a senior official in the Putin regime for two decades. She was its chief economic adviser for just over a year before becoming president of the Central Bank in June 2013, having previously served as minister of economic development while Putin was prime minister.

“She’s very trusted by the government and the president,” said Sofya Donets, an economist at Renaissance Capital in Moscow who worked at the Central Bank from 2007 to 2019. In recent years, it has become evident that all sorts of political issues in the financial sphere were delegated to the Central Bank, he added.

That trust was built while Nabiullina supported Russia’s economy against Western sanctions, especially given the far-reaching American penalties. In 2014, the United States cut many large Russian companies from its capital markets. But these companies were heavily in debt in foreign currency, raising alarms about how they would pay off their debts.

Nabiullina began squeezing as many US dollars out of the economy as possible so that companies and banks would be less vulnerable if Washington further restricted the country’s access to the use of dollars.

She also shifted the bank’s reserves, which were worth more than $600 billion, into gold, euros and yuan. Over the course of his tenure, the share of dollars in reserves has dropped from more than 40% to around 11%, Nabiullina told parliament last month. Even after sanctions froze the bank’s overseas reserves, the country has “sufficient” reserves in gold and yuan, she told lawmakers.

Other sanctions protections included an alternative to Swift, the global banking messaging system developed in recent years. And the bank changed the payments infrastructure to process credit card transactions in the country, so even the departure of Visa and Mastercard would have minimal effect.

In March, Bloomberg News and The Wall Street Journal, citing unnamed sources, reported that Nabiullina tried to resign following the invasion of Ukraine and was refuted by Putin. The Central Bank has denied these reports.

Last month, the Canadian government placed her under sanctions for being a “close associate of the Russian regime”.

war economy

After Nabiullina spent nearly a decade building a reputation for containing inflation and bringing traditional monetary policy to Russia, Western financial penalties imposed after the Ukraine invasion quickly forced her to abandon her preferred policies. She more than doubled the interest rate to 20%; it used capital controls to severely restrict the flow of money out of the country; ended the trading of shares on the Moscow Stock Exchange; and loosened regulations on banks so that lending wouldn’t stop.

These measures stopped the initial panic and helped the ruble to recover, but capital controls were only partially lifted.

Now Russia is entering a deep recession with a closed economy. On April 29, the bank lowered its interest rate to 14%, a sign it is shifting from cracking down on a financial tornado to trying to minimize the lingering impact of sanctions on households and businesses as inflation accelerates and businesses are forced to reinvent their supply chains without imported goods.

Inflation has risen sharply and could reach an annual rate of 23% this year, the Central Bank predicts. The overall economy could shrink by up to 10%, according to the bank.

“We are in a zone of enormous uncertainty,” said Nabiullina.

Translated by Luiz Roberto M. Gonçalves