DIgest
What ‘Manual Control’ Looks Like During a Crisis
August 29, 2023
Nikolai Petrov
Visiting researcher, German Institute for International and Security Affairs
(Stiftung Wissenschaft und Politik)
Nikolai Petrov looks at how Putin’s system of administration has functioned against the backdrop of the ruble’s sharp depreciation in August and its coverage in the media.
Maxim Oreshkin, a Putin economic advisor. Putin has leaned on Oreshkin and the government to stop the fall of the ruble. Source: Wiki Commons
According to the Central Bank, in the first seven months of 2023, the real effective exchange rate (REER, an index that reflects the strength of a currency relative to a basket of other currencies), for the ruble fell more than 25%. Against the dollar, the ruble has weakened 27.5% since the beginning of the year, and almost 30% versus the euro. At a scheduled meeting on July 21, the Central Bank raised its key rate, which had been unchanged since September 2022, from 7.5% to 8.5%. This did not help, however, and the ruble continued to weaken. On Friday, August 11, the dollar was over 99 rubles, approaching the 100 mark.
Who is to blame?
This seemed to be an important psychological milestone for Putin, and at 8:00 on Monday, August 14, an article by Maxim Oreshkin, a presidential aide for economic matters, appeared on the TASS website in which he attributed the weakening of the ruble and the acceleration of inflation to excessively loose monetary policy by the Central Bank. Oreshkin put the blame for the collapse of the ruble not on the government and the Kremlin, which have ratcheted up budget expenditures amid falling revenues, but on the Central Bank, which supposedly cut the key rate too quickly.
When the markets opened on August 14, the ruble had crossed the 100 mark against the dollar, and by noon it had slid to 101. That morning, the Central Bank said that the ruble situation did not pose a threat to financial stability. At 10:20, an emergency meeting of the government began, though the official agenda – judging by the opening speech of Prime Minister Mikhail Mishustin – included various issues that nonetheless had nothing to do with the ruble. It was strange considering that even though the prime minister usually meets with his deputies on Mondays, there were only three of them there; and two ministers also attended: Minister of Economic Development Maxim Reshetnikov and Finance Minister Anton Siluanov.
According to fragmentary information about this meeting, Siluanov was the only member of the economic bloc who supported the tightening of FX controls. What exactly was reported to Putin following the meeting at the (Russian) White House is unknown, but by the evening the Central Bank had changed its position and announced that an extraordinary meeting of its board of directors was scheduled for the next day (Tuesday, August 15) where the key rate would be discussed.
On the morning of August 15, the Central Bank raised its key rate by 3.5 percentage points from 8.5% to 12.0% “to limit risks to price stability.”
“Inflationary pressure continues to increase,” the Central Bank wrote in the press release. “As of August 7, annual inflation had risen to 4.4%. Meanwhile, the current rate of price growth continues to accelerate. On average, over the past three months, seasonally adjusted current inflation was 7.6% on an annualized basis. The similar indicator of core inflation increased to 7.1%.”
Who is to blame?
This seemed to be an important psychological milestone for Putin, and at 8:00 on Monday, August 14, an article by Maxim Oreshkin, a presidential aide for economic matters, appeared on the TASS website in which he attributed the weakening of the ruble and the acceleration of inflation to excessively loose monetary policy by the Central Bank. Oreshkin put the blame for the collapse of the ruble not on the government and the Kremlin, which have ratcheted up budget expenditures amid falling revenues, but on the Central Bank, which supposedly cut the key rate too quickly.
When the markets opened on August 14, the ruble had crossed the 100 mark against the dollar, and by noon it had slid to 101. That morning, the Central Bank said that the ruble situation did not pose a threat to financial stability. At 10:20, an emergency meeting of the government began, though the official agenda – judging by the opening speech of Prime Minister Mikhail Mishustin – included various issues that nonetheless had nothing to do with the ruble. It was strange considering that even though the prime minister usually meets with his deputies on Mondays, there were only three of them there; and two ministers also attended: Minister of Economic Development Maxim Reshetnikov and Finance Minister Anton Siluanov.
According to fragmentary information about this meeting, Siluanov was the only member of the economic bloc who supported the tightening of FX controls. What exactly was reported to Putin following the meeting at the (Russian) White House is unknown, but by the evening the Central Bank had changed its position and announced that an extraordinary meeting of its board of directors was scheduled for the next day (Tuesday, August 15) where the key rate would be discussed.
On the morning of August 15, the Central Bank raised its key rate by 3.5 percentage points from 8.5% to 12.0% “to limit risks to price stability.”
“Inflationary pressure continues to increase,” the Central Bank wrote in the press release. “As of August 7, annual inflation had risen to 4.4%. Meanwhile, the current rate of price growth continues to accelerate. On average, over the past three months, seasonally adjusted current inflation was 7.6% on an annualized basis. The similar indicator of core inflation increased to 7.1%.”
Elvira Nabiullina, chief of Russia's Central Bank. In late August, unlike during previous crises, Putin did not publicly express his confidence in the Central Bank. Source: VK
Central Bank head Elvira Nabiullina – unlike the last time the key rate was raised, from 7.5% to 8.5% on July 21, and she spoke in detail about the reasons behind and prospects for the Central Bank’s policy – did not have any comments. On August 16, FX trading on the Moscow Exchange opened at 96 rubles per dollar, down from the peak of 101 rubles the day before. After the Central Bank announced the key rate hike, the ruble rallied to 95.5 before subsequently stabilizing at 93-95.
That evening, Putin’s usual meeting with the economic bloc of the government, held once every two weeks, took place. Nabiullina was absent, and judging by the official transcript, the fall of the ruble was not discussed either. The main topic was economic development in coal-mining regions. In the “current issues” section, besides fighting fires and floods, there was only positive news: a record number of fish is being caught, the number of sports schools is rising, and a climate change monitoring system is being rolled out.
According to press reports based on informed sources, after that, Putin met with members of the government and the Central Bank head, where Nabiullina, Oreshkin and the ministers Siluanov and Reshetnikov presented their vision of the situation in the FX market.
There are no official reports that such a meeting took place, but on August 17 the Central Bank denied press allegations that Nabiullina suggested thinking about raising import duties to cool off demand for imports. Meanwhile, the government has not set requirements for the sale of FX earnings by exporters or imposed restrictions on the movement of capital, at least not yet.
It has been reported that before the meeting with Putin, the cabinet had managed to informally agree with a number of large exporters to raise their FX sales. This would keep exporters free from a requirement to sell FX earnings to the Central Bank. (Immediately after the start of the war, amid the collapse of the ruble, the government obliged exporters to sell 80% of FX earnings to the Central Bank; in May 2022, this requirement was cut to 50% and in February 2023 it was canceled altogether.)
Due to a decreasing cost of energy, net sales (minus purchases) of FX earnings have recently been declining (from $7.0 billion in June to $6.9 billion in July), although the share of net FX sales in FX earnings of the largest exporters, according to the Central Bank, amounted to 88% in May and 84% in June.
What happened at the ‘secret meeting?’
According to one of the sources, at the meeting with Putin, Nabiullina explained why the decision to raise the key rate had been made, and explained that it was due not so much to the exchange rate but to heightened inflation risks.
According to Kommersant correspondent Dmitri Butrin, at the meeting the Ministry of Finance allegedly proposed introducing the mandatory sale of 90% of FX earnings, which would hardly be feasible without hurting complex gray-import schemes, which are being implemented with the support of the government. The same applies to the application of other measures that would hinder cross-border capital flows.
Putin performed his usual role of arbiter, this time between the “technocrats” from the Central Bank, who proposed cutting government spending, and “technocrats” from the government, who insisted on a sharp increase in the key rate.
The informal agreements between the government and business – instead of the former setting clear rules binding on all exporters, as was done in February 2022 – are an important sign of the times.
That evening, Putin’s usual meeting with the economic bloc of the government, held once every two weeks, took place. Nabiullina was absent, and judging by the official transcript, the fall of the ruble was not discussed either. The main topic was economic development in coal-mining regions. In the “current issues” section, besides fighting fires and floods, there was only positive news: a record number of fish is being caught, the number of sports schools is rising, and a climate change monitoring system is being rolled out.
According to press reports based on informed sources, after that, Putin met with members of the government and the Central Bank head, where Nabiullina, Oreshkin and the ministers Siluanov and Reshetnikov presented their vision of the situation in the FX market.
There are no official reports that such a meeting took place, but on August 17 the Central Bank denied press allegations that Nabiullina suggested thinking about raising import duties to cool off demand for imports. Meanwhile, the government has not set requirements for the sale of FX earnings by exporters or imposed restrictions on the movement of capital, at least not yet.
It has been reported that before the meeting with Putin, the cabinet had managed to informally agree with a number of large exporters to raise their FX sales. This would keep exporters free from a requirement to sell FX earnings to the Central Bank. (Immediately after the start of the war, amid the collapse of the ruble, the government obliged exporters to sell 80% of FX earnings to the Central Bank; in May 2022, this requirement was cut to 50% and in February 2023 it was canceled altogether.)
Due to a decreasing cost of energy, net sales (minus purchases) of FX earnings have recently been declining (from $7.0 billion in June to $6.9 billion in July), although the share of net FX sales in FX earnings of the largest exporters, according to the Central Bank, amounted to 88% in May and 84% in June.
What happened at the ‘secret meeting?’
According to one of the sources, at the meeting with Putin, Nabiullina explained why the decision to raise the key rate had been made, and explained that it was due not so much to the exchange rate but to heightened inflation risks.
According to Kommersant correspondent Dmitri Butrin, at the meeting the Ministry of Finance allegedly proposed introducing the mandatory sale of 90% of FX earnings, which would hardly be feasible without hurting complex gray-import schemes, which are being implemented with the support of the government. The same applies to the application of other measures that would hinder cross-border capital flows.
Putin performed his usual role of arbiter, this time between the “technocrats” from the Central Bank, who proposed cutting government spending, and “technocrats” from the government, who insisted on a sharp increase in the key rate.
The informal agreements between the government and business – instead of the former setting clear rules binding on all exporters, as was done in February 2022 – are an important sign of the times.
“On the one hand, it is easier to solve problems that arise as emergencies; on the other hand, instead of a systematic solution, Putin has chosen a situational, stopgap maneuver, which once again points to the extremely short planning horizon of government officials.”
Putin took the side of the government – he ordered a sharp hike in the key rate to prevent the ruble from weakening past the symbolic mark of 100 rubles per dollar. Thus, he addressed the momentary problem, “bringing down the fever” without eliminating the cause of the “illness.”
The Central Bank sees its task in targeting inflation and seeks to stabilize inflation around the target level of 4%, and it does not particularly care about the exchange rate. But Putin cares about the exchange rate, especially with elections around the corner. At the meeting with the president, Nabiullina emphasized that the problem is excessive fiscal spending, which is fair, though cutting expenditures is hard and would not produce results quickly. And again, given the upcoming elections, cutting spending, both military and social, is unacceptable for Putin.
The current way of handling the plummeting ruble – “manually,” with the exchange rate surging and FX interventions by unknown business entities – is markedly different from what was seen at the very beginning of the war, in February 2022, when the Central Bank raised the key rate from 9.5% to a suffocating 20.0%. Other stabilization measures included a fee on the purchase of FX on exchanges, limits on withdrawing cash from accounts, mandatory selling of 80% of exporter FX earnings, and restrictions on the movement of funds to foreign accounts (some of these measures were gradually abolished or significantly softened).
The fundamental logic is now the same as in February 2022, only complicated by the upcoming elections. A sharp depreciation of the ruble is dangerous not only because of the possible psychological consequences (though it is clear that Putin reacted nervously to the magic number of 100) – the fall of the ruble destroys the picture of stability and economic growth that the Kremlin has been purposefully painting and, moreover, portends an increase in inflation, which is a serious cause for concern for the Kremlin.
To slow the weakening of the ruble, the sharp hike in the key rate proved enough, at least for now. On the issue of inflation, Nabiullina appears to be of the same mindset as expressed in the above-mentioned Central Bank statement in July (which talked about the intention to keep inflation at 4%); still, she was forced to give in under pressure from Putin.
Unlike previous crises, Putin has not publicly expressed his confidence in the Central Bank, and on August 22, at a meeting of the Council for National Projects, Nabiullina was absent, replaced by her deputy. In Putin’s words, spoken during this meeting, dissatisfaction with the Central Bank shows through: “In recent months, volatility has increased significantly in the financial markets... Obviously, such fluctuations make it difficult for business, enterprises and ordinary people to make investment decisions. The government and the Bank of Russia need to make more active use of the tools they have, fine-tune to them to the objective situation.”
A mental reconstruction of the course of events may look like this: on Friday, August 11, when the ruble almost weakened past 100 to the dollar, Putin demanded that Oreshkin and the government urgently stop the fall of the ruble. Since Nabiullina could not be forced to change her position, Oreshkin publicly expressed his vision of the problem in the abovementioned TASS interview, while Mishustin called a meeting the same day.
The Central Bank sees its task in targeting inflation and seeks to stabilize inflation around the target level of 4%, and it does not particularly care about the exchange rate. But Putin cares about the exchange rate, especially with elections around the corner. At the meeting with the president, Nabiullina emphasized that the problem is excessive fiscal spending, which is fair, though cutting expenditures is hard and would not produce results quickly. And again, given the upcoming elections, cutting spending, both military and social, is unacceptable for Putin.
The current way of handling the plummeting ruble – “manually,” with the exchange rate surging and FX interventions by unknown business entities – is markedly different from what was seen at the very beginning of the war, in February 2022, when the Central Bank raised the key rate from 9.5% to a suffocating 20.0%. Other stabilization measures included a fee on the purchase of FX on exchanges, limits on withdrawing cash from accounts, mandatory selling of 80% of exporter FX earnings, and restrictions on the movement of funds to foreign accounts (some of these measures were gradually abolished or significantly softened).
The fundamental logic is now the same as in February 2022, only complicated by the upcoming elections. A sharp depreciation of the ruble is dangerous not only because of the possible psychological consequences (though it is clear that Putin reacted nervously to the magic number of 100) – the fall of the ruble destroys the picture of stability and economic growth that the Kremlin has been purposefully painting and, moreover, portends an increase in inflation, which is a serious cause for concern for the Kremlin.
To slow the weakening of the ruble, the sharp hike in the key rate proved enough, at least for now. On the issue of inflation, Nabiullina appears to be of the same mindset as expressed in the above-mentioned Central Bank statement in July (which talked about the intention to keep inflation at 4%); still, she was forced to give in under pressure from Putin.
Unlike previous crises, Putin has not publicly expressed his confidence in the Central Bank, and on August 22, at a meeting of the Council for National Projects, Nabiullina was absent, replaced by her deputy. In Putin’s words, spoken during this meeting, dissatisfaction with the Central Bank shows through: “In recent months, volatility has increased significantly in the financial markets... Obviously, such fluctuations make it difficult for business, enterprises and ordinary people to make investment decisions. The government and the Bank of Russia need to make more active use of the tools they have, fine-tune to them to the objective situation.”
A mental reconstruction of the course of events may look like this: on Friday, August 11, when the ruble almost weakened past 100 to the dollar, Putin demanded that Oreshkin and the government urgently stop the fall of the ruble. Since Nabiullina could not be forced to change her position, Oreshkin publicly expressed his vision of the problem in the abovementioned TASS interview, while Mishustin called a meeting the same day.
“Thanks to the joint efforts of Oreshkin and the government, proposals were presented to Putin, and he put pressure on Nabiullina for the Central Bank to urgently hike the key rate.”
The Bloomberg article on discussions within the government's "economic bloc" that Russian journalists used as a source. Source: Bloomberg
As for the meeting, held in a “secretive format,” the reason for the secrecy is that the Kremlin categorically does not want to draw attention to the emerging problems, wanting to demonstrate only its successes and large-scale plans. Thus, in the published reports from Putin’s meetings with the government, they never talk about difficulties or disagreements, only about good things. This applies to both the presidential and government websites, which are often incomplete, since their purpose is not so much information as propaganda.
Information about the discussions within the economic block of the regime and some episodes of how the crisis is being dealt with, nevertheless, leaked, though the Russian media could not publish it without the Kremlin’s permission. Instead, it was leaked to Bloomberg and the FT, and only then the domestic media published it, citing “foreign sources.”
Information about the discussions within the economic block of the regime and some episodes of how the crisis is being dealt with, nevertheless, leaked, though the Russian media could not publish it without the Kremlin’s permission. Instead, it was leaked to Bloomberg and the FT, and only then the domestic media published it, citing “foreign sources.”
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