Elvira's Ruble Denominated Brooches

Apr 9 , 2022
By Christian Tesfaye

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The Russia-Ukraine war has gripped the world. It has precipitated a humanitarian crisis unheard of in Europe in decades while it has sent global prices for commodities such as fuel, wheat, fertilisers, nickel and steel soaring. An emergency of massive geopolitical proportion, it is forcing a rethink in global institutions, values and practices.

For the curious, some interesting things are also happening in the monetary policy sphere. It has to do with Russia and the sanctions that the Western community has imposed. The latter have waged an economic war against Russia, the 11th largest economy globally. In the aftermath of the sanctions in the early days of March, particularly the freezing of its externally held central bank reserves and the banning of its major banks from the SWIFT global messaging system, the ruble has been in free fall, or so it seemed.

When the invasion of Ukraine began, there was talk of a disastrous defeat of its military by Russian forces. It never came to pass. The Ukrainians are holding their own. In the same vein, when a rainstorm of economic sanctions were unleashed against Russia, there was punditry that the ruble would only be useful as toilet paper. This, too, did not come to pass.

What type of sorcery is the Russian central bank employing to rescue the ruble from some of the most severe economic sanctions the world has ever seen? Could there be any interesting takeaways from this?

Primarily, it is important to keep in mind that, despite all of the sanctions against Russia, its oil and natural gas are still being sold worldwide, especially to Europe. Since the country is heavily resource-dependent economically, this means a great deal. As the prices of these natural resources are going through the roof, the Russian economy still enjoys a significant windfall in its export sector. By some estimates, Russia makes up to a billion dollars every day from natural gas and oil exports. Add to this the fact that sanctions have affected its ability to import, and the country could be left with an elevated trade surplus by the end of the year.

All of this matters because a central bank needs foreign currency to support the local currency. The ruble will live another day as long as the petrodollars keep flowing – which they will for a while unless Europe bites the bullet and bans Russian gas and oil. But this is only one piece of the puzzle. There are more reasons that the ruble is above water, and it all has to do with the central bank’s juggling act.

The governor of the Russian central bank is Elvira Nabiullina. A no-nonsense advocate of free markets, she is a technocrat who long ago identified inflation as her sworn enemy, over and above GDP slowdown. She has a flair for the dramatic, wearing specific types of brooches during events to signal regulatory decisions. Having proved herself in steering Russia’s economy seemingly unscathed through a previous slew of sanctions imposed in 2014, she is probably one of the few people President Vladimir Putin still respects. Her actions, since sanctions on a biblical scale were imposed against her country in the aftermath of the invasion, have been curious. In more ways than one, it looks like an attempt to reinvent modern monetary policy consensus.

Recently, her central bank announced the return of the gold standard, fixing the ruble to gold prices. It should be said that gold is considered a safe haven, an asset class that is least turbulent during volatility. By extension, it should also make the ruble highly stable. There is just one significant kink in this plan: the central bank has to be able to exchange any ruble for gold if anyone asks for it. This requires Russia to maintain large gold reserves at all times. It also makes stimulating the economy incredibly hard because if the central bank wants to follow an expansionary monetary policy, it will have to devalue its currency in a harmful manner. This is precisely why the US dropped the gold standard in 1971.

The gold parity is only the latest of Governor Elvira’s moves. Last month, she doubled benchmark interest rates and, critically, reintroduced capital controls and cut foreign currency retention of local companies by four-fifths. Voila! The ruble is now as strong as before Russia invaded Ukraine.

Have no doubts about it. The Russian economy will most likely go into recession this year. A strong ruble only makes a complete cataclysm less probable. Elvira is putting up a much better fight than expected. The odds are against her but she seems as creative as ever to reinvent monetary policy, or take it to the classics with moves such as introducing the gold standard. If she succeeds – and that is a big “if” – we will be studying her in economics classes for years to come.

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PUBLISHED ON Apr 09,2022 [ VOL 23 , NO 1145]

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