MOSCOW — Elvira S. Nabiullina, the governor of Russia’s central bank, was deep into a speech about her new currency policy when it became clear nobody was paying attention.
Her audience, chief Russia economists from a dozen or so foreign banks, were looking down at their laps to nervously check their smartphones. The ruble, which had been slowly slipping after a predawn interest rate increase by the central bank, had just plunged 19 percent.
Outside the chandeliered, czarist-era conference room in the central bank’s headquarters, the panicky signs of an economic crisis were taking shape on the streets. Muscovites desperate to unload increasingly worthless rubles were frantically buying televisions, washing machines, winter coats and other goods.
While Ms. Nabiullina was receiving notes from aides about the rout during that December meeting, she kept right on with her speech, extolling the virtues of dropping the currency’s two-decade trading peg and letting market forces have their way.
“Her message was, ‘We are not targeting the rate; the ruble will do what it does,’” one of the bankers at the closed-door meeting recalled of the speech.
Ms. Nabiullina’s commitment continues to be tested daily.
A diminutive, bookish think-tank economist, Ms. Nabiullina is a staunch believer in the benefits of a flexible exchange rate and a weak currency, if market forces dictate. And she has cheerily defended this stand even as the ruble became the second-worst-performing currency in the world last year. Only the Belarussian currency, also called the ruble, lost more value.
“It’s completely impossible to control the exchange rate and try to maintain some sort of orientation,” she told the Russian Parliament last fall. “It’s impossible to combat fundamental global factors.”
It is a tricky balancing act.
As the turmoil rages, lowering interest rates will keep banks afloat, but sacrifice the ruble. Raising rates will save the ruble, only to deepen an economic recession.
The central bank unexpectedly cut interest rates in late January. The move suggested that Russia sees banking problems and economic weakness as more pressing priorities than the ruble’s troubles.
It also again highlighted Ms. Nabiullina’s willingness, apparently with the approval of President Vladimir V. Putin, to step back from defense of the ruble, now in one of its worst post-Soviet free falls. The ruble, now trading at around 66 to the dollar, has lost about half its value over the last year.
Citing the governor’s busy schedule, the bank’s press service declined a request to interview Ms. Nabiullina.
The decision to let the ruble fall for the sake of other economic goals is emerging as one of the few consistent Kremlin policies. In the face of falling oil prices and Western sanctions over its Ukraine policy, it is a painful, but necessary, step to wean Russians from imports.
Elsewhere in the government, confusion seems to reign. Last month, Anton G. Siluanov, the finance minister, laid out a long-promised “anticrisis” budget calling for 10 percent cuts. The minister of economy, Aleksei V. Ulyukayev, had earlier said no cuts were needed.
The bank’s policy is committing Russia to a weak ruble. “If the ruble depreciates rapidly, it would be very, very difficult for the central bank to reverse itself and hike rates now,” said Blaise C. Antin, a portfolio manager with TCW.
Viewed through the lens of Russia’s recent economic history, Ms. Nabiullina’s embrace of a weak ruble comes into sharper focus.
Years of economic growth followed the ruble devaluation of 1998. The weaker ruble lowered costs for Russian factories and farms. By some estimates, it provided more of a lift to the economy than did rising oil prices during Mr. Putin’s first presidential term from 1999 until 2004.
The bright side of a currency crash became a core lesson for Russian economists of her generation — and a significant influence in the current environment. While the central bank has tapped into Russia’s foreign currency reserves to defend the ruble, it could have spent significantly more, but didn’t. The bank still holds about $385 billion in gold and foreign currency reserves.
It was a point Ms. Nabiullina made the day the ruble collapsed in the panicky sell-off of Dec. 16. Leaving the meeting with the corporate banking analysts, Ms. Nabiullina gave an interview to Russian television, drawing attention to the disaster’s silver lining.
“We have to learn to live in a different zone,” she told Russia 24 television. Russians should “orient ourselves more toward our own sources of financing, projects, and to give a chance to import substitution.”
In Russia, Ms. Nabiullina is both an insider and an outsider.
She worked for nearly a decade close to the inner circle of Kremlin power. After serving as minister of economy, Ms. Nabiullina became chief economic adviser to Mr. Putin in 2012. She was named governor of the Bank of Russia in June 2013.
Yet among senior officials, Ms. Nabiullina, 51, stands out for being a woman and an ethnic Tatar and, not least, for her steadfast support for market-oriented policies in an increasingly state-dominated system. She is part of a faction in the Kremlin of economic liberals, who are increasingly out of favor.
“Given all the complaints that Westerners have about institutions in Russia, this is one institution that actually works well,” Ivan Tchakarov, the chief Russia economist at Citigroup in Moscow, said in an interview. “When the pressure has risen to soften, they have tightened instead.”
One seemingly miraculous result of the weak ruble policy has been that Russia’s oil-dependent budget has remained mostly in balance despite the sharp drop in oil prices. That is because both the price of oil and the ruble lost about 50 percent of their value simultaneously. So a barrel of oil now brings the Kremlin roughly the same number of rubles as it did a year ago.
And some companies are already being buoyed, counterintuitively, given the glum outlook by investors on Russia lately. With costs in rubles and export profits in dollars, the steel maker Severstal is cash-rich; it is buying back $600 million in bonds due in the next two years. Its fellow Russian steel maker, Evraz, is trying to buy back $750 million ahead of schedule this year.
To her critics, Ms. Nabiullina simply let down her guard on her nation’s money.
One member of Parliament in the ruling United Russia party last fall called the bank an “enemy of the nation” and said its rate-setting team was bent on doing “evil.”
And it is unclear how long Ms. Nabiullina can hold out. Anger about the bank’s passivity is rising. Last month, a top aide to Ms. Nabiullina, Ksenia Yudaeva, an economist trained at the Massachusetts Institute of Technology, resigned as chief of monetary policy, by some accounts after being pushed out.
Along with Ms. Nabiullina, Ms. Yudaeva had orchestrated the switch to the free float. An economist who once served in the Soviet Union’s central bank, Dmitry Tulin, took her place.
With time, their reputation might revive, Robert Schlegel, a member of Parliament, said in an interview. “People who have more of a burden of responsibility suffer more criticism,” he said.
original source: http://www.nytimes.com/2015/02/10/business/international/rubles-fall-tests-governor-of-russias-central-bank.html?_r=0