Russia’s central bank is cutting rates to boost the war economy

Elvira Nabioullina, présidente de la Banque centrale de Russie.


Elvira Nabiullina, president of Russia’s central bank, has had a lot of work to do to manage monetary policy since her country’s invasion of Ukraine on February 24. In order to avoid the effects of the soaring ruble on rising prices, the monetary institution has decided to reduce the key rate again from 14% to 11% with effect from this Friday. This is the third since the invasion of Ukraine. It reduced it to 17% on 8 April and reduced it again from 17% to 14% on 3 May. At the beginning of March, the rate was suddenly raised from 9.5% to 20% to prevent a currency collapse, the country found itself in a state of outcasts, isolated by the first European sanctions adopted in retaliation for the invasion.

Since then, the ruble has experienced evolution like a roller coaster. After collapsing to almost 132 rubles per dollar on March 4, it has since appreciated and become the most powerful currency in the international foreign exchange market this year. On May 23, it traded down to less than 55 rubles per dollar, which is its best level in 7 years. This Friday it was around 67 rubles per dollar.

“This process of constantly strengthening the ruble is undoubtedly a topic that requires special attention.”Kremlin spokesman Dmitry Peskov said earlier this week, a sign that this is a big problem for Vladimir Putin because it supports rising prices.

Inflation in April was the highest in 20 years

Inflation accelerated in April. It reached 17.8% year on year, compared with 16.7% in March, and recorded the strongest increase since January 2002, supported mainly by rising food prices (20.48% in one year).

“Inflationary pressures are easing due to the dynamics of the ruble and a marked decline in household and corporate inflation expectations. Year-on-year inflation reached 17.8% in April, but slowed to 17.5% in May 20, declining faster than in the Bank of April forecast Russia. “the Russian central bank explained in a press release.

However, this optimism does not go so far as to refine the inflation forecast for this year, when it already estimates it between 5% and 7% for 2023 and 4% in 2024.

Rising prices are a traditional subject of social discontent, which can lead to protests, as was the case in 2021. A situation that the Russian president wants to avoid so as not to lose popular support for the war. The risk is all the greater that the wages of Russian workers will suffer from a decline in activity in the country. According to the Central Bank of Russia, in February, before the invasion, the average real wage increased by 2.6% in one year. However, this trend was supported by the private sector, where real wages rose by 4.9%, while in the public sector they fell by 3.6%. However, with the decline in activity, the private sector will be most affected. Russia’s real GDP is expected to fall by 10.2% this year, according to S&P Global Market Intelligence.

That is why President Vladimir Putin on Wednesday announced a 10% increase in pensions and the minimum wage, which will apply from June 1. The measures, which should cost the state budget $ 10.5 billion this year, said Finance Minister Anton Silouanov.

Decrease in imports, lack of product supply

Whether that will be enough remains to be seen. The rise in prices in Russia is, in fact, primarily the result of a shortage of product supply and not a sharp rise in demand. Its imports would have fallen by 44% since the beginning of the invasion and exports would have increased by 8% at the same time, according to The Economist, according to Russia’s eight main trading partners. According to Chinese data, exports of goods to Russia fell by a quarter year on year in April, as imports from Russia jumped by more than 56%. Germany reported a 62% drop in exports to Russia in March, while imports from Russia fell 3%. If Russia is on track for a record trade surplus this year, it will not be due to the dynamism of its companies.

However, the fall of the ruble is beneficial for them for those who can still export. “Risks to financial stability have diminished somewhat, allowing some capital control measures to be eased”the press release of the Russian central bank specifies.

This relaxation is already effective. Companies that received payments in foreign currency, especially Russian energy giants such as Gazprom and Rosneft, had to convert 80% of it to rubles, now the demand has dropped to 50%. This should facilitate relationships with their customers.

Because, despite the sanctions and firm tone adopted by the European Commission, many European companies, including Italy’s Eni and France’s Engie, have adopted – or are still acting – the ruble’s gas payment principle imposed by the Kremlin to honor supplies to its customers.

To date, only an agreement has been reached on a European embargo on coal imports. From 1 August, it will apply strictly sensu.

The oil import embargo, which has been discussed for several weeks, could be announced at the next European Council on 30 and 31 May, provided that negotiations on aid to Hungary of EUR 800 million are successful. The country is most dependent on Russian oil imports due to infrastructure, especially refineries, which are not suitable for switching to alternative supplies.

As far as the gas embargo is concerned, due to dependence and limited short-term alternatives, especially LNG, it is currently only a matter of reducing imports. In particular, the European Union is asking its Member States to replenish their gas reserves to 85% by 1 December in anticipation of the winter season. And part of these reserves should still be Russian gas.