Why Nabiullina became Russia's central bank governor

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Putin gets a strong but pliant central bank governor in Elvira Nabiullina. She might please other constituents too.

Elvira Nabiullina was not an obvious choice for Russia’s first new central bank governor in a decade. Most thought the president would pick a deputy governor, head of a state-owned bank, or perhaps former finance minister Alexei Kudrin.

But Vladimir Putin’s nomination, which he announced last month, is understandable. Under Putin’s patronage, Nabiullina’s star has risen in recent years.

When Putin was prime minister, she proved trustworthy as his economy minister. When he returned to the presidency in 2012, he chose Nabiullina as his chief economic aide.

A central bank insider such as Alexei Ulyukayev, the first deputy governor, would have been acceptable for markets and strengthening of institutional independence. But it would have been more of an unknown for Putin.

Being so close to Putin will make it easier for Nabiullina to push through Russia’s G20 commitments on Basle III despite local banks’ resistance. Existing central bank technocrats would have less sway.

Similarly, as the government tries to make Moscow an international financial centre, the central bank is taking over regulation of non-bank financial institutions. Nabiullina has more power to enforce the accompanying reforms.

Markets would have reacted well if Putin had picked Kudrin, if Kudrin wanted the job. Largely thanks to Kudrin, Russia’s state finances managed to survive the 2008 crisis without complete collapse. He is an influential player.

Before 2002, the present governor, Sergey Ignatiev, was Kudrin’s deputy in the finance ministry. While Kudrin remained finance minister until 2011, the two men’s philosophies on economic policy did not seem to diverge much.

Like Kudrin, Nabiullina would be unlikely to reverse Ignatiev’s policy of moving towards inflation targeting. Indeed, there seems to be a degree of consensus in Russia, since the financial crisis, about the necessity of that policy.

However, Kudrin publicly fought with former president and now prime minister Dmitry Medvedev shortly before the 2012 elections. It might still be awkward for Putin to rehabilitate Kudrin while Medvedev is prime minister.

Moreover, after the elections and anti-government street protests, Putin faces slowing economic growth. He might be wary of a hawkish governor. And unlike Kudrin, Nabiullina’s experience is at a ministry tasked with promoting growth.

Kudrin’s local and international standing is such that he would have been more powerful than Nabiullina in his own right. At times of stress, if Putin disagreed with his monetary policies, he might have been more likely to keep to his position.

Heads of state-owned banks, eager for cheap funding, have been vocal in their opposition to high central bank rate increases. But VTB’s relative stock valuation indicates how markets could react to its CEO, Andrei Kostin, being governor.

Sberbank CEO German Gref has more respect in markets, despite criticizing high policy rates in recent months. He would also have had no trouble twisting arms. In fact, as economy minister in the early 2000s, he was Nabiullina’s boss.

But perhaps Gref is now one more constituency Nabiullina has won over. Meanwhile, Gref’s ambition (like that of Kudrin) might reach higher than the central bank governorship.