Sunday, June 30, 2024

As the Russian Rouble Strengthens Against Both The Dollar And The Yuan, How Long....

....can Madame Nabiulina keep this up?

The fact the rouble is strengthening against the yuan is especially interesting. Though the stated reason for current Russian interest rate levels is tamping down an overheating economy, there is another effect.

China has Russia in a position where Putin has to acquiesce to some pretty tough trade terms imposed by Xi, a function of selling into an oligopsony market. The Russian Central Bank can recover some of the revenue lost due to sanctions-related Chinese bargaining power through currency changes.

Here's how many roubles it takes to buy the Chinese currency, down is a stronger rouble:

Chart Image


Same trend for the rouble vs the dollar:

Chart Image


And from The Economist's 1843 Magazine, May 30:

Meet the poetry-loving banker who keeps Putin’s war going
How long can Elvira Nabiullina work her magic?

On August 14th 2023 Moscow was a city on edge. Ukrainian drones were flying into its buildings. Yevgeny Prigozhin, the warlord who had marched a mutinous army towards the capital a few weeks previously, was still at large. But what most unnerved Muscovites that warm Monday was the state of the rouble.

Tracking the ups and downs of the local currency, which is highly sensitive to global energy prices, is a national pastime in Russia. When it falls below 100 to the dollar people start to worry. I watched my acquaintances sit grimly glued to their screens as the rouble crashed through the psychological watershed. Where, people muttered, were the umnyi professionali (clever professionals) at the central bank?

There is one “clever professional” in particular that Russians have come to rely on in recent years: the bank’s 60-year-old chief, Elvira Nabiullina. Nabiullina is a bespectacled technocrat whose unassuming demeanour conceals a ferocious intellect and drive. A protégée of one of Russia’s most influential liberal economists, she has spent most of her 11 years in the job trying to foster an open, stable, well-regulated economy in a country more used to either communism or chaos.

Nabiullina is one of the few central bankers whose mere presence at the helm can be enough to calm markets, and she’s dealt deftly with the dramas generated by Vladimir Putin’s geopolitical ambitions. After Western countries imposed a range of sanctions on Russia in 2014 following Putin’s annexation of Crimea, she steered the rouble through the ensuing confidence shock with minimal damage. Her passion for data-driven decision-making and willingness to stick to liberal economic policies under pressure led Christine Lagarde, then the chief of the International Monetary Fund (IMF), to celebrate her for making “central banking sing”.

A presenter on state TV went on air raging that the “bloody central bank” hadn’t 
even explained “why the hell the rouble exchange rate has jumped so high”

Such compliments came to an abrupt halt after Moscow’s full-scale invasion of Ukraine in 2022. Unprecedented sanctions ensued, including restrictions on the sale of Russian oil and gas in Europe. Rumour has it that Nabiullina feared for the arrest of her deputies at the bank if she didn’t stay on to safeguard the economy. Whatever her motivation, she helped cushion Russian banks from the initial shock (over time the country’s vast oil and gas firms proved surprisingly adept at finding new, non-Western customers). Putin’s critics saw her and other technocrats as complicit in the subsequent bloodshed in Ukraine.

By August 2023 the country’s economic resilience seemed to be flagging. Chinese purchases of Russian oil had helped mitigate the effect of Western sanctions, but Beijing’s own slowdown affected its energy consumption, hurting the rouble.

Nabiullina didn’t rush to protect the currency – her instinct is to let it stand on its own two feet as much as possible. The absence of intervention provoked harsh criticism. Vladimir Solovyev, a presenter on state TV, went on air raging that the “bloody central bank” hadn’t even explained “why the hell the rouble exchange rate has jumped so high that they’re laughing at us abroad”. At lunchtime on August 14th, Putin’s economic adviser, Maxim Oreshkin, published a piece which went even further, explicitly blaming the central bank for the currency’s fall, and implying that it should have raised interest rates to give the rouble a temporary boost. It seems unlikely that two such high-profile political figures would have attacked Nabiullina without at least tacit support from the Kremlin.

In fact the bank had posted a statement on its website shortly before Oreshkin’s op-ed came out announcing that an emergency meeting would take place the next day. Evidence that Nabiullina was on the case seemed to provide enough reassurance to reverse the rouble’s trajectory. It closed the day at about 98 to the dollar – still low, but on the right side of the all-important 100 mark.

In an attempt to keep it there Nabiullina went on to institute a series of massive interest-rate hikes (the rate currently stands at an eye-watering 16%). She also had to go along with capital controls, a protectionist measure that runs contrary to everything she had previously tried to do with the economy. The latter were ordered by Putin himself, who required Russian exporters to convert their foreign profits into roubles in October 2023. Very unusually, Nabiullina publicly criticised the policy, which she said could “only be a short-term remedy”.

Nabuillina’s friends say she is one of the few advisers granted leeway to speak candidly to Putin, which he appreciates. Their unlikely partnership has lasted 20 years and weathered numerous crises. Since 2022 her macroeconomic dexterity has given Putin room to increase war spending. During his re-election campaign this year he was able to – not inaccurately – tout the Russian economy as the fastest-growing in Europe.

But managing the demands of the war machine and the ever-evolving impact of sanctions makes Nabiullina’s job increasingly challenging. War spending has kept the economy growing, but raised the possibility of dangerous levels of inflation. Lately, Nabiullina finds herself working to entrench an economic and political configuration which takes the country further from her early dreams of a transparent, well-regulated free market.

“She can’t tell him this is wrong, this destroys what I’ve been doing for 30 years,” said Konstantin Sonin, a Russian economist who used to work with Nabiullina. “She’s not using her acumen, she just does what Putin says.”

There are no outward signs that Nabiullina is anything less than committed to her job. However, there is chatter in Russian business circles that she submits her resignation at regular intervals, only to have it rejected. Insiders say it would be too dangerous for her to leave before Putin wants her to go.

As a studious teenager Nabiullina fell in love with opera and poetry, especially the French writer Paul Verlaine

Putin’s war economy may face a reckoning at some point, regardless of what Nabiullina does. But she is crucial to delaying that moment. Fiona Hill, a former Russia adviser to America’s National Security Council, believes she could even be the bridge between Russia and the global economy. “When the West comes back to do business with Russia, which will happen sooner or later when the war is over, Nabiullina may be the person they feel they can do business with,” said Hill.

Can she keep the ship on course until then? And as a state-led war economy takes hold, does a poetry-reading technocrat like her have what it takes to push back against the “patriots”?....


An odd little connection between war and Verlaine: the first three lines of his poem, "Chanson d'automne";

Les sanglots longs
Des violons
De l’automne

was the signal broadcast to the French resistance unit, Ventriloquist, working south of Orléans on June 1, 1944 to signal that D-Day was imminent and to be alert for the coming signal to begin destroying rail lines in earnest. That signal, the second three lines of the poem was broadcast by the BBC on June 5.

Blessent mon coeur
D'une langueur

It worked, Ventriloquist caused so much chaos on the rail lines that two panzer divisions sent to fight the Allies took as long to cross France to the western battle zone as it had taken them to move from the Russian front to the French border.

And back to Nabiulina, we are fans of her skills and understanding of central banking and wish she were running the U.S. Federal Reserve. Previously:

Here's one from January 2024's "How China talked markets out of a run on the yuan":

 If a country is spending $1 trillion to defend its currency, they are doing it wrong. As was pointed out in June 2022's "An Analysis of The Wartime Actions Of Governor Elvira Nabiullina and The Russian Central Bank":

....The key to any currency operation by a central bank is the art of patience. You can't go burning through your FX reserves attempting to support your fiat. See any number of examples with Soros v. Bank of England being the first that comes to mind. You have to wait for that inflection point where the speculative raid is running out of momentum and then go huge, sweeping any offers and coming back and saying "What else ya got?"
This is apparently what Nabiullina did, minus the American colloquialism, of course.
And another from that month:
Sometimes It's Easy To Foretell The Future

This piece was posted 2 1/2 months before Russia invaded Ukraine

Tuesday, December 7, 2021
Former Swedish Prime Minister Bildt: "It’s time to let Russia know once and for all that Ukraine is off limits"

That was the headline on his December 6 Washington Post OpEd.

The question, of course, is how are you going to enforce it?

Reuters reported earlier today: "West could cut Russia from SWIFT, sanction Nord Stream, Latvia says"

Do they think Russia hasn't thought of this possibility? Of course they did, a decade ago.

We're dealing with a nation of chess players. They've gamed out four possibilities, sixteen countermoves and 64 counter-countermoves. Meanwhile the American military have been working on their pronouns.

And the Russians also have a secret weapon: Elvira Nabiullina, the head of the Russian central bank.

Imagine having to do a high wire act, allowing the rouble to fall, keeping rates up to counteract the inflationary tendency that introduces, trying to account for the huge asset flows in the underground/oligarch economy while all the while Putin is yelling at you from the sidelines.
She is very good at what she does.

She has already considered and put on the back-burner a proposal to use the Orthodox Church as an internal payment system,  It's there, just in case, you know, the electronic stuff goes down.

Here's the introduction to 2018's "Russia’s central bank quietly raised its key interest rate by 0.25 percentage points on Friday":

If you think having Donald Trump question the Fed head for raising rates is playing rough, just imagine working for Vlad Putin as his popularity drops.
Considering the hand she's been dealt, the chief of the Russian central bank, Ms. Nabiullina, should have garnered a couple more Euromoney Central Banker of the Year awards to sit next to the one she received in 2015.

Seriously, since she took over in 2013 oil prices collapsed, then doubled, the annexation of Crimea led to the first set of sanctions, the rouble fell 50%, the U.S. Treasury threatened Russian banks with exclusion from SWIFT, the second set of sanctions on companies and oligarchs led to the retraction of multi-billion dollar credit facilities which had to be replaced internally and a couple other things that I'm having trouble remembering....

She has payment systems in place with China and together with the oil & gas honchos is ready to redirect those flows. 

And finally, if things escalate, what is to stop the Chinese from attacking Taiwan at the same time Russia moves its border west. With a two-front war, NATO and the U.S. would be shown to be paper tigers.

Here's an ungated version of the WaPo OpEd at the University of Pennsylvania.

And a final thought. When the SWIFT threat was being bandied about, Russia had no alternatives so she needed both an emergency solution and a longer term solution,

The emergency plan was to use the Church, as mentioned above
The longer term plan became the Mir payment system which inspired China's CIPS.

An attempt to use SWIFT sanctions would result in the creation of a parallel system.

 And a couple weeks earlier: Russia's Central Banker And Ukraine's War Dead

The highlight of the currency vs. oil price is very intriguing and understanding that goes a long way toward understanding Russia's economy and government and the war in Ukraine. 

The underlying facts are that Russia is balancing three legs of a trilemma stool, adjusting one leg, then another in an attempt to find an equilibrium.

The Governor of Russia's central bank, Elvira Nabiullina knows the oil price-currency interplay.

And all the while Vladimir is looking over your shoulder....

That was one of many posts that we gathered in 2020's "Russia's Central Bank Gamed This Scenario Out Years Ago, Did Yours?".