Steely Nabiullina fights Russia’s fires

By:
Sid Verma
Published on:

Elvira Nabiullina, Euromoney’s central bank governor of the year, is staunchly sticking to her controversial crisis-fighting plan as Russia reels from its biggest financial crisis since 1998. As sanctions and falling commodity prices threaten Putin’s oil-financed state patronage, the central bank – the last bastion of economic orthodoxy – is battling to craft a new growth model. Can Nabiullina turn crisis into opportunity?

Nabiullina-dragonslayer-600At a time when Russia teeters on the brink of pariah status among the political leaders of the west, Elvira Nabiullina is a divisive figure in her own country. In the flesh, she seems an unlikely candidate to stir such emotions.

Euromoney meets the governor of the Central Bank of Russia, her translator, and an aide, in a resplendent meeting room at the stately Tsar-era CBR headquarters in Moscow’s Neglinnaya Street, which runs from the Bolshoi Theatre to Trubnaya Square. Nabiullina is softly-spoken, under-stated, and circumspect. She waxes lyrical about her price-stability agenda with Bundesbank-esque passion.

She also bats away countless questions Euromoney asks surrounding the independence of the CBR, from the political establishment, strategic corporates and Putin himself.

In a rare and wide-ranging interview, Euromoney’s central bank governor of the year defends her shock-and-awe monetary tactics late last year, when she hiked interest rates and committed to the free-float of the rouble.

“There were some voices that said, under the difficult circumstances, we should defer the decision to adopt the flexible-exchange and an inflation-targeting regime,” Nabiullina says. “But it became quite obvious that our currency policy did not allow us to meet the challenges. The market did not trust us. Speculative forces were growing. Expectations of devaluation were growing among the population and they started to convert the currency. Essentially, there was no trust left in that exchange rate policy and it did not allow us to meet the challenges from the point of view of building reserves. So we made the decision to accelerate the move to a floating exchange rate because this regime would absorb the external shocks.”

Nabiullina’s commitment to a flexible exchange rate is classic economic orthodoxy, which Russia was late to impose in the global financial crisis when it belatedly permitted FX depreciation after wasting billions of reserves in maintaining an implicit band.

From Chile, to Colombia, to Australia, the results are clear: a flexible exchange-rate system allows countries to respond to external economic shocks better than those with fixed exchange rates, since economic agents adjust immediately to relative price changes from nominal depreciation. This adjustment also compares favourably to pegged countries where relative price moves and structural shifts in goods and labour markets are more challenging to achieve.

Capital controls were removed in 2006, further cementing Putin’s contract with oligarchs, who were happy to offer political support in return for capital mobility. Euromoney asks whether capital restrictions were considered in the grip of the crisis, as many Western observers had predicted.

Nabiullina is emphatic: “Capital controls were not even under review by the central bank because I believe that the Russian economy and financial system, despite the difficulties, are part of the global system. After we opened the capital account many years ago, it would be counter-productive and controls, in practice, would not have worked.”

Nabiullina’s move, since her appointment in June 2013, to expand FX liquidity facilities – adding new maturities and broadening the definition of eligible collateral in auctions – injected capital and liquidity into the banking system. Despite bearish bets that systemically-important lenders could collapse and Russia would march towards a corporate debt crisis – the outstanding stock of which at its peak represented 40% of GDP – the financial system has weathered the storm.

The CBR’s shock therapy has worked. True to form: imports in the first quarter of 2015 duly declined sharply, reflecting weak domestic demand, in part, thanks to rouble depreciation, which moved the real exchange rate towards levels consistent with medium-term fundamentals. Earlier this year, the external-sector adjustment brought down consumer price inflation, and gave the central bank room to cut rates. What’s more, in May, the CBR suspended the one-year FX repo facility, signalling a return to relative monetary normality.

Moral suasion has helped too. The CBR has installed liaison officers at banks, with a pretext of boosting supervisory oversight in the trenches, but, in reality, bankers say they are seeking to root out anti-rouble speculative bets on trading floors. Still, the governor strikes a free-market note when asked about the role of domestic speculators, among banks and cash-rich state companies, who were blamed by the finance ministry for the hoarding of rouble liquidity last year.

“Speculative operations grow when the existing regime does not match the economic trend, when the central bank keeps the currency policy even when prices are dropping, where there is no access to external financial markets and the currency is going to devalue and everyone knows this,” the governor says. “It’s just a matter of ordinary expectations of the currency failing to match reality. Once we introduced a higher interest rate and the free-float the speculative behaviours against the currency declined quite dramatically.”

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The question of the CBR’s independence vexes the Moscow market. But many concede Putin has given Nabiullina a large degree of freedom to pursue a market-friendly war-plan, by floating the rouble and rejecting capital-controls, which would have further isolated Russia from international finance

Go back to the end of 2014 and such sanguine sentiments would have seemed misplaced. Fear and confusion rocked the Kremlin and the CBR. An oil- and sanctions-driven storm was ravaging the country.

The Kremlin bet that with unemployment and inflation still at post-Soviet lows – and anti-Western sentiment rising – the domestic backlash, over the plummeting rouble and Russian economy, would be held in check.

But Russia needed a battle-plan to stave off the external shocks. In the eyes of foreign investors, its post-Cold War risk premia had been repriced. US and European efforts to use international finance as an instrument of retaliation against Russia for its annexation of Crimea, through sanctions, imperilled its integration in global markets. Fears of a financial crisis, and unorthodox policy measurers, snowballed.

A rescue plan centred on the CBR’s decision in November to float the rouble, which experts said would tame speculators and avoid wasteful interventions, with the CBR lavishing $30 billion on the failed endeavour in the previous month alone. What’s more, economists continued to laud Russia’s arsenal of FX reserves at $400 billion and its current-account surplus comfortably financed external debt even amid surging capital outflows.

But by mid-December, a perfect storm brewed that would trigger a loss of market confidence in the rouble – and the central bank itself.

Amid a sharp decline in the country’s terms of trade and looming debt redemptions, capital outflows had reached their highest level since the 1998 crisis. Retail deposit outflows jumped. Meanwhile, speculators bet the CBR would use its foreign-exchange reserves to defend the exchange rate, despite the free-float. Banks and large companies, state as well as private, continued to hoard liquidity.

But a new risk emerged which – combined with the structural local-currency illiquidity and market panic – would eventually break the currency.

On December 15, despite a stable oil price, Russian stocks and the rouble lost an astonishing 30% in the subsequent 24 hours. The blame, traders say, lies squarely with Rosneft, the largest state-owned oil company, which decided to raise – in the teeth of resistance from its peers – a R625 billion ($9.5 billion) bond in local markets, sucking up liquidity and savaging market confidence. The CBR was forced to facilitate this large, systemically-important, underhand deal – which analysts say must have been signed off by Putin himself – by scheduling a special auction, and promoting its securities as collateral in its refinancing operations.

Amid fears Rosneft would convert the bond proceeds into dollars, roiling the rouble further, the CBR at 1am on December 16 was forced into a shock interest rate hike of 650 basis points to bring the benchmark rate to 17%.

But later that morning, the move seemingly proved futile and the rouble traded as low as R80/$1, a day the market dubbed ‘Black Tuesday’.

The market feared the Kremlin lacked a transparent and orthodox strategy to pay off corporate debt while faith in the monetary plan vanished. The rouble was in a tailspin.

With markets collapsing in the background, in a scheduled meeting for economists held at the CBR, first deputy governor Ksenia Yudaeva spent over an hour waxing lyrical about the academic allure of inflation-targeting regimes, which the central bank had formally embraced. For the analyst community, the episode was a sobering reminder of how the monetary authority was caught off-guard by the market volatility and its failure to communicate a crisis-fighting strategy.

Later that Tuesday, as governor Nabiullina witnessed the impotence of the emergency rate hike on the currency market, she held steady. The CBR would not fight the currency market to uproot the market expectation it has an implicit target, she declared. This would leave the market to guess the size and frequency of interventions, when warranted – such as bidding to stabilize inflation-expectations or the financial system – thereby hiking the cost of FX speculation.

The governor’s firm commitment to the free-float, the aggressive rate hikes and a return in market confidence, breathed life into rouble trading and engineered Russia’s macroeconomic adjustment. As a result, a large number of observers, including the IMF, credit the governor for her crisis-fighting credentials. Some say her hawkish policy stance is helping to nurture a new growth cycle by building up savings – to roughly 30% of GDP this year from a low of 22% in 2014 – providing the fuel, they hope, to finance Russia’s pent-up investment needs.

Ivan Tchakarov, Citi’s chief Russia economist, says: “Although I don’t want to be cavalier about the risks facing Russia, on the monetary-policy front, I think the authorities have done a fantastic job in facilitating macroeconomic adjustment. Russia has sufficient reserves to engineer macroeconomic adjustment and a 6% current-account surplus fully covers net capital outflows without the country needing to draw down on reserves to cover the gap. The macroeconomic indicators – fiscal policy, current account, monetary – are not consistent with financial or macro-economic stress.”

However, Nabiullina remains a controversial choice for the Euromoney award. Her critics say the CBR’s monetary communication over the past year has been littered with flaws, citing its unexpected rate cuts earlier this year, and its botched announcement of its FX reserve-buying plan. What’s more, they say it should have hiked and accelerated its regime shift before the December crisis, while the Rosneft deal compromised its independence.

 “I think it’s a mistake for the CBR to say it doesn’t care about the exchange rate level before reaching its inflation target."

Nataliya Orlova, Alfa Bank

That Rosneft transaction remains the stick with which many of her detractors beat Nabiullina. Surely its underhand nature, which traders say had a systemic impact on the currency, compromised the CBR’s independence?

The governor, in rare comments on the controversial decision, disagrees. “The central bank made the decision according to the rules but it turned out Rosneft was in a very difficult position at the time. According to the rules, we have to include them in the collateral list, because the bond was a reliable security. When you have such a major exporter with large export revenues and it issues rouble bonds that are listed in the markets, it is going to have an impact, since the value of the securities was high. There were concerns in the market about the proceeds of the issue and whether it would be sent to the currency market. But the situation in the market was quite tense irrespective of the deal. The rouble market at the time interpreted any news about corporate refinancing as a reason for fear.”

Asked what lessons can be learnt from the Rosneft saga, she says: “I think we need to continue to communicate to the markets that, under our assessment, corporates would be able to refinance the external debt, without creating a systemic impact. More information is critical of course.”

The governor has found support from former finance minister Alexei Kudrin, who was originally shortlisted to lead the CBR. Responding to the events of Black Tuesday, Kudrin wrote on Twitter: “The central bank’s decision to raise the rate to 17% was forced on them by the current climate and is the right one. The fall of the rouble and the stock market is not just a reaction to the low price of oil and to sanctions, but also due to a lack of confidence in the government’s economic policy.” But he specifically pointed the blame at Rosneft for the “wrong” timing of the “opaque” deal. In response, a Rosneft spokesperson hit back at the CBR for “pushing Russia towards recession”.

The question of the CBR’s independence vexes the Moscow market. No-one doubts Putin can craft its policies in his image. But many concede he has given Nabiullina, the first-ever female head of a G8 central bank, a large degree of freedom to pursue a market-friendly strategy, by floating the rouble and rejecting capital-controls, which would have further isolated Russia from international finance.

Hiking rates to a punishing 17%, permitting widespread FX volatility and allowing the exchange rate to find a floor – savaging access to credit, reducing real incomes more than the 2009 adjustment, and placing the burden disproportionately on households rather than producers – has earned Nabiullina domestic rebuke. Bankers are aghast at the cost of financing and margin pressure across the sector, while some ruling party members have castigated the CBR for its actions. Nikolai Arefyev, deputy head of the Duma’s Committee for Economic Policy, for example, called Nabiullina’s austere rate hike a “state crime.”

Nabiullina says she has not encountered political pressure directly at the CBR, which is headquartered less than a mile away from Red Square. “After the decision was made, there was a lot of criticism especially in parliament and very dramatic statements were made. People were very concerned about the economy. I didn’t have sleepless nights. Maybe that’s because my nervous system is naturally tough or because of my experience of the economic crisis in 2008, which is quite recent.”

Markets initially viewed her surprise appointment in June 2013 with a degree of suspicion fearing she wouldn’t assert the CBR’s institutional autonomy and would, instead, promote a dovish policy. Some called her a compromise choice – trusted by Putin but accepted by reformists. Born in Ufa, in the republic of Bashkortostan, located between the Volga River and the Ural Mountains, the governor has been in senior government positions, in an economic-reform capacity, on and off since 1994, before rising to economy minister.

She is seen as a pragmatist, rather than an ideologue. Her supporters describe her as smart, conciliatory and a consensus-former. Her weaknesses are well known. One Moscow-based economist explains: “Nabiullina is a good bureaucrat and economist. But she lacks skills to communicate the CBR’s message to the market.”

In recent weeks, the rouble has fallen to levels not seen since last year’s abyss in tandem with the oil price, reigniting fears over the prospect of a financial crisis. But, in Moscow, there is little evidence that corporates, bankers, or traders are panicking. Markets and households have already adjusted to this new FX normal. Russia remains, in the near-term, relatively insulated to shocks this year thanks to low leverage and closed access to capital markets, and the flexible exchange rate has front-loaded adjustment.

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Influential former finance minister Alexei Kudrin supported Nabiullina’s decision to raise interest rates to 17% in response to events of Black Tuesday

Even before the geo-political crisis, Russia was paying the cost of its post-crisis consumer-driven growth model, which saw real wages rising in excess of productivity gains. This caused Russia’s growth rate to fall to just 1.3% in 2013. Relatively high wages and a weak investment climate have created a competitiveness trap, which can only be solved in two ways. Either Russian wages fall precipitously or Russian productivity rises through improvements to institutions and the investment climate.

The CBR, with some support from the Kremlin, is trying to engineer the latter. Slaying inflation could sow the seeds of a new investment cycle. After all, low inflation boosts discounted cash-flow valuations of companies, lowers the cost of debt, and increases the predictability of investment returns, as well as the capacity to borrow at lower rates for households and corporates.

Despite 600bp of rate cuts this year, Goldman Sachs estimates the forward-looking real policy rate could be around 7%, as of early July. The CBR reckons inflation will need to fall below the 4% mid-term target to “anchor expectations at lower levels”, Goldman says. Fiscal policy is also doing its part, with the budget tightening in the second half of this calendar year.

In short, Putin has bitten the fiscal bullet and weakened the oil-financed state patronage that has been key to his power base since 2000. The repeat of the fiscal splurge in the post-Kudrin years, which led to a non-oil deficit of 10% of GDP, in the next two years is unlikely. The finance ministry says the era of automatic real-wage growth in the public sector, accounting for one in five workers in the country, is over. The National Reserve Fund is likely to be exhausted by the end of next year.

As a result, fiscal and monetary policy is extremely tight relative to the output gap. The aim: to sacrifice near-term growth on the altar of a new investment-led growth model.

Russia’s domestic savings are too low, commodity revenues have collapsed, while foreign investment flows have vanished. Policymakers are, therefore, seeking to raise the domestic savings rate to nurture a pool of domestic capital to finance investments. The real effective exchange rate is the most effective channel to engineer this structural shift since depreciation in the short-run reduces real wages and boosts the cash-flows of producers.

Lower inflation rather than a further fall in the nominal exchange rate will be the best way to boost savings, say economists. VTB Capital economist Alexander Isakov adds: “If you look at the outlook for net exports, government consumption, and household consumption – especially considering the weak wage- and credit-growth prospects – the most likely means by which Russia can grow is via private investment.”

But there is no consensus on whether the CBR will be able to meet its 4% inflation target by end-2017. Putin’s counter-sanctions, imposed in retaliation for Western punitive actions, have bedevilled her mission since the Kremlin’s ban on food and agricultural imports, combined with domestic production constraints, have stocked inflation.

Still, Nabiullina recites her price-stability mantra with Paul Volcker-esque intensity. She adds that, although increasing the stock of savings is desirable, the CBR is seeking to channel the flow of savings into productive investments to create a stable local capital market. Most savings currently sit in bank deposits. The assets of insurance companies and mutual funds combined, for example, are just 2%-3% of GDP. The CBR is, therefore, introducing minimum capital requirements and transparency guidelines on the buy-side to increase the confidence of retail investors, she says.

But the CBR’s macro strategy is littered with risks. A weak exchange rate and high real rates could savage credit growth, further fuel outflows, without any benefit accruing to the domestic economy, while disproportionately hitting households and inflation-expectations, say critics.

Nataliya Orlova, chief economist at Alfa Bank, adds: “I think it’s a mistake for the CBR to say it doesn’t care about the exchange rate level before reaching its inflation target. The Russian people do not trust inflation statistics but they consider the exchange rate as a benchmark. It is important that the CBR conduct estimates of the rouble fair value and communicate it to the market.”

Sergey Aleksashenko, deputy chairman of the CBR between 1995 and 1998, says Russia is “too weak to sustain a comprehensive free-floating regime”. He says a policy of constructive ambiguity over the scenarios in which the CBR intervenes would be appropriate but thinks it should only do so when the rouble appreciates too aggressively.

Evgeny Gavrilenkov, chief economist at Sberbank, issues a sharp rebuke. He reckons the CBR should cut rates to fuel growth combined with quantitative tightening by immediately ending its refinancing facilities to banks against non-market collateral. He says the size of these instruments, and the relatively long-term maturities, were key domestic factors behind the rouble crisis.

In other words, the CBR stimulated the rouble’s collapse by providing downward expectations on the currency and provided financial intermediaries with excess liquidity to bet against it, he says. Only with rate cuts can the CBR “break the vicious cycle” in which high sovereign bond yields constrain credit growth and investment. Gavrilenkov’s comments have been widely quoted in the Russian financial press, much to the governor’s chagrin.

She says: “We issued as much liquidity as necessary in order to bring the market rate close to our key policy rate.”

VTB’s Isakov, a former market operations official at the CBR, clarifies further. “The changes in volume of refinancing facilities are not a statement about the monetary policy stance but a technical operation to provide the banking sector liquidity to offset the impact of other factors affecting it, including net government spending. The CBR’s refinancing facilities are simply designed to ensure the functioning of the inter-bank payments system and to help banks meet their reserve requirements. If you don’t provide this liquidity, the inter-bank payments system would collapse.”

He adds: “The bigger challenge that Russia has to face is not that of insufficient demand but a need to adjust to a sizeable real terms-of-trade shock. CBR’s toolkit is not suitable for offsetting permanent external shocks. Blunt rate cuts would be counter-productive because they would cause inflation and further delay the adjustment.”

 “Although I don’t want to be cavalier about the risks facing Russia, on the monetary-policy front, I think the authorities have done a fantastic job in facilitating macroeconomic adjustment"

Ivan Tchakarov,
Citi

The economic debate in Moscow is impassioned, and some see the CBR as responsible for last year’s crisis. Gavrilenkov’s views fall outside consensus but they underscore the frenzied debate about the CBR’s policy course – the only anchor for growth at a time Russian financial conditions are, in some respects, the worst since Putin came into power in 2000.

Daily trading of stocks has fallen 80% over past four years, equity valuations are kissing 1997 levels, and foreign fixed investors have fled en mass. The CBR, according to observers, is the last bastion for economic orthodoxy since Kudrin left the finance ministry in 2011.

The CBR’s plan to build FX reserves also courted mild controversy when it was announced. Some analysts said the plan made a mockery of its free-float, given such interventions typically weaken the currency and could exacerbate inflation. What’s more, since CBR’s $500 billion target-level was expressed in absolute terms rather than in relation to a monetary target, such as import-cover or as a percentage of external debt, analysts inferred it was a Kremlin diktat.

However, the CBR has since softened the plan and staggered it over a longer timeframe, based on oil-price targets, among other factors. But the governor accepts the reserve-strategy should have been better communicated. “I agree 100% that we need to improve our communication because there were so many changes to monetary policy last year, and the analysts are used to a different, more stable policy. We need to improve.”

Economists and traders say the CBR has sharpened its communications in recent months, by, for example, spelling out its inflation-targeting regime in more detail. But the suspicion that it follows a discretionary approach rather than ex-ante rules remains.

In any case, the monetary guardian’s current FX- and inflation policy course will be derailed if oil prices fall further.

Bankers are worried that a prolonged era of low oil prices at $45 a barrel, for example, could devastate the financial system in the coming years. In January, Sberbank president German Gref warned: “That [oil-price prospect] means that the government will recapitalize banks and increase its stakes in them, and banks will buy industrial enterprises to turn into financial-industrial groups. Then all our economy will be the state.”

To Putin’s detractors, and critics of Russia’s economic model, more generally, the latter point is key: the fall in the oil price, which delivers half of state revenues, threatens the social contract for Putin whereby Russian citizens support the president in favour of economic and domestic security. Sanctions against oligarchs, fiscal constraints, and the lack of credit to finance another consumption boom – which in the last cycle was oiled through international channels, as Russian banks and corporates became large net external debt issuers – in theory undermine his rule.

Moscow financiers downplay some of the more-bearish rhetoric from reformists, saying it’s designed to increase leverage for structural reform despite the up-front political costs. The prospect of an upcoming financial crisis is remote, they say. After all, oligarchs subject to sanctions only have net wealth of $25 billion combined, bank deposits are growing, while a large portion of external debt issuance has been used to finance foreign acquisitions with little domestic benefit, aside from the net investment income boosting the current account.

The stock of foreign debt has fallen from $732 billion in August 2014 to a manageable $550 billion today. Since 2006, the state’s share of the economy has grown from 38% of GDP to around 50% – and much higher in transport, banking, and commodities – while SMEs represent 20% down from 30% in 2012.

The consensus view is that reforms are unlikely until Putin establishes a new mandate at the 2018 elections. There have been rumours of a Kazakh-style move to bring the election forward to 2017, but this looks a remote possibility.

Establishment liberals such as Sberbank’s Gref and Kudrin are typically pitted against more statist-orientated figures such as Igor Sechin, the Rosneft chairman, and until his removal, Vladimir Yakunin, head of Russian Railways. The latter’s dethroning in late-August is interpreted by Kremlin observers as a bid by Putin to reshuffle his inner circle and heap pressure on state companies to boost productivity amid tight fiscal cash-flows.

But no-one reckons big structural reforms – downsizing the public sector materially, cutting the economic rent of natural monopolies and protecting property rights – are feasible given the up-front political costs. Citi’s Tchakarov explains: “The relative emphasis on reforms, and the influence of the reformists, has declined because of the geopolitical crisis, while the slowdown in the economy reduces the political appetite to introduce shocks to the system.”

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“[The prospect of oil at $45 a barrel] means that the government will recapitalize banks and increase its stakes in them, and banks will buy industrial enterprises to turn into financial-industrial groups. Then all our economy will be the state”

German Gref,
 Sberbank

As a result, weak growth is on the cards, what Tchakarov dubs “non-disruptive stagnation”. Orlova at Alfa Bank reckons Russia’s potential growth rate has fallen to just 0.5%-1% compared with her previous 1.5%-2% estimate in 2013.

Aleksashenko, a former deputy finance minister under Boris Yeltsin, and a fierce Putin critic, adds: “The main areas of reform – political competition, rule of law, property rights protection – are all personally opposed by Putin. Businesses don’t want to invest as there is little respect for property rights.”

Is the country marching towards a growth crisis without supply-side redress? The governor treads carefully. “When the oil prices are high it does not always stimulate reforms. Now, there are some reforms being discussed, for instance, the removal of bureaucratic pressures, making monopolies more transparent, and introducing a moratorium on higher taxes.”

She argues there is scope to boost Russian productivity levels without privatization. “If we privatize state monopolies they will just become private monopolies. If there are monopolized activities it is important for them to be transparent and, where you can, develop the environment for competition.”

She mentions French economist Jean Tirole, who won a Nobel prize last year for his work on stimulating competition in monopolies, which he says, put simply, needs to be calibrated to every industry’s specific conditions.

Policymakers hope import substitution, infrastructure investment and Eurasian economic integration will boost growth. Still, most say even if these efforts pay off, a sustainable growth rate of 3% is possible, in the best scenario, in part, given Russia’s demographic pressures. This is lower than the 4%-4.5% annual expansion Moscow could consistently deliver if it modernized its economy, say economists.

As the centre of financial gravity shifts Moscow eastwards, Russia is taking baby steps to reduce its monetary dependence on the West. The governor confirms the CBR is helping to establish a national payments system to reduce its reliance on Swift, after fears last year that Russian banks would be sanctioned from the global financial-messaging network.

“We are minimising the risks linked to the negative external factors but, nevertheless, we would like to remain a part of the global payments system because we import goods in the global economy, and our capital account is open,” Nabiullina says. “The access to the global financial infrastructure is important to us.”

Amid Western sanctions, Putin is gunning for a multipolar monetary world, with China now likely to provide the bulk of external financing to Russia, which is also a shareholder in the China-dominated Asian Infrastructure Investment Bank, a competitor to the Bretton Woods institutions.

But the governor is under no illusion the country can decouple from Western finance. For all the talk about rising Sino-Russian ties, she says the renminbi is not represented in Russia’s reserves-arsenal, citing liquidity constraints, though its lack of convertibility has not deterred Nigeria and Chile from a holding a portion of currency in their baskets, respectively.

Nabiullina concedes Russia’s capital amnesty and the drive to root out the practice of Russian companies using offshore subsidiaries purely for tax relief, at present, is yielding minimal results. Asked whether, among other factors, this reflects the lack of confidence in domestic investment opportunities, the governor spells out the need for supply-side reforms. “We have to improve the investment climate, through predictability of taxation, removal of administrative barriers, and fair competition.”

She concludes: “What I am also trying to drive home is that using only monetary measures to create conditions for macro-economic growth is insufficient. The key to economic prosperity is somewhere out there.”

Nabiullina’s comments are the classic under-statement of a technocrat, uncomfortably installed in what is, to all intents and purposes, a political office. It’s not her style to use the CBR as a soapbox to tout the virtues of, and desperate need for, structural reforms, or outline the specifics. There might be an opportunity cost in not doing so, or it’s smart politics. Either way, Nabiullina is battling valiantly to arrest Russia’s structural decline, by stimulating a new investment cycle through FX, inflation and banking reforms.

The rest is up to Putin.