The Russian central bank will meet on Tuesday to discuss the interest rates after the rouble dropped below Rbs100 per dollar. This sparked a debate among policymakers about how to handle the economic fallout of the war in Ukraine.
The extraordinary meeting is being held after the central banks, who had been scheduled to not hold another rate-setting meeting until September 15th, announced that it may increase its current key interest rate of 8.5%. The decision will be announced at 10.30am Moscow Time on Tuesday.
After nearly a year-and-a-half since Vladimir Putin’s full full scale invasion, Russia’s technocrats struggle to balance competing priorities, such as economic growth and stabilizing the currency. The dollar is currently at a 16 month low.
On Monday, the rouble’s rapid decline prompted rare disagreements between top Russian officials as the Kremlin tried to calm growing concerns about the currency and continue to praise debt-fueled growth which had weakened it.
Anatoly Aksakov, the head of the Finance Committee in the Duma told Ura.ru, a local news website, on Monday, that “businesses in his native region, Chuvashia, are overloaded, and increasing production levels.”
“People get their salaries. “The [region] lives life to the fullest. Everyone is smiling, and it is not a concern that the dollar rate has reached 100 roubles,” said he. The effect of the war has been felt even further away from Moscow.
The rolling ticker that ran across the offices of a local news agency in Surgut, an oil town in Siberia, was replaced on Sunday with text saying: “Putin’s a dickhead, and a theft.” You’ve lost it! 100 roubles for a dollar.
Maxim Oreshkin wrote an article on Monday for the Russian state newswire Tass that contained a thinly-veiled criticism of central bank. He claimed that “a strong ruble is in the interest of the Russian economic recovery”, which was he said recovering from a recession that occurred last year.
Oreshkin attributed the fall of the rouble to the central bank’s easing of monetary policy. He said this had led an additional Rbs12.8tn debt-fuelled demands that were overheating the economic.
Oreshkin wrote that the current exchange rate is significantly different from its fundamental level and will normalize in the near term.
The central bank said that the rouble, which had been under pressure due to other factors, including a decline in exports and a simultaneous rise in demand for imported goods, as well as an increase in government debt, was also being impacted by a drop of export volumes.
The central bank stated that it would likely raise rates at its next scheduled meeting to stabilize inflation at the target of 4%, but also added that the decline in the rouble did not pose a threat to Russia’s financial stability.
The rouble has fallen as a result of a combination of factors, including a ballooning deficit from increased military expenditures, a decline in export revenues, and an increasing reliance on imported goods.
Inflation rose to 4.3% in July, above the target rate set by the central bank. This year’s inflation is expected to range between 5% and 6.5 percent.
Natalia Lavrova is the chief economist of BCS Global Markets. She says that although it remains lower than most of Europe due to Russia’s energy reserves and its early removal of restrictions imposed by the coronavirus, inflation was 8.5% in July, adjusted for season.
The rising inflation has pitted Elvira Nabullina, the central bank governor, against her hardline opponents who are pushing for lower interest rates to encourage borrowing.
“The state’s spending and subventioned borrowing has fundamentally weakened the rouble,” said Alexandra Prokopenko. She is a former official of the central bank and a non-resident scholar with the Carnegie Russia Eurasia Center.
She compared her response to the story about a drunken person who looks for his keys under a lamppost instead of in the park where he had lost them. She said that blaming the central banks is similar to a drunkard searching for his keys under a lamppost rather than in the park where he lost them.
Economists claim that policymakers struggle to maintain Russia’s economic stability while sustaining Putin’s war machines and reducing the impact of Western sanctions.
Last week, Konstantin Sonin wrote on Twitter that “the rouble will gradually lose value as the current forecast is that war and Russian budget deficits (to fund it) will continue for many years, until Putin steps down or dies.”
Last week, the central bank announced that it would cease foreign currency purchases until this year’s end to “reduce volatility”. Sonin says that the impact of such measures on the rouble will be limited, as more than half the Russian foreign reserves have been frozen by western sanctions.