Central Bank

The limits of Russian sanctions

Russian Central Bank Governor Nabiullina presents the new 200 and 2,000 rouble banknotes in Moscow
Sanctions or no sanctions, Russia's central bank chief says the economy is recovering. Source: Reuters

For Russia’s economy, the end of 2014 was something of a perfect storm, Elvira Nabiullina, the country’s central bank chief, remembers. In addition to sanctions imposed by the West, Russia had to deal with a collapse in oil prices. “The effect of the oil price was larger than that of the sanctions,” she said in an interview. “Now the economy has gotten used to both factors. The economy is growing again.”

That may not be what European and American leaders would like to hear. After all, the whole point of economic sanctions is to convince political leaders like Russian President Vladimir Putin to change course. Sanctions were imposed on Russia in the aftermath of its annexation of Crimea from Ukraine.

The numbers bear out Ms. Nabiullina’s argument. Russia’s economy grew at a 2.5 percent annual rate in the second quarter of this year, nearly a five-year high and the third straight quarter of growth for Russia after nearly two years in a recession. Overall the International Monetary Fund sees the economy growing 1.8 percent this year.

“Sanctions are not positive for the financial sector.”

Elvira Nabiullina, Russian central bank chief

Ms. Nabiullina’s remarks could give fodder to both sides of the Atlantic: Critics of sanctions, which include a number of German politicians and companies that have close business ties to Russia, would point out that there’s little point in continuing something that is having little effect. Supporters would say this is an argument for making sanctions even tougher – something the United States is considering imposing unilaterally by targeting energy firms, over the stiff opposition of German and European politicians who fear their own economies will be caught in the crossfire.

Ms. Nabiullina of course is no politician. Her job as central bank chief is to steer the Russian economy. But she did say that she believes sanctions are here to stay. “Our forecasts for continued economic development are built on the assumption that they will remain in place.”

Even if the Russian economy has adapted, it would be wrong to say that sanctions have had no effect at all. Ms. Nabiullina said that foreign direct investment in Russia has fallen since December 2014 as the economy fell into a downward spiral, though she said some foreign investors are starting to return to the country’s bond markets. “That shows Russia’s macro-economic stability.”

Inflation also remains a mixed bag in the country. Ms. Nabiullina noted that inflation has fallen to below 3 percent – better even than her own medium-target of keeping price increases at 4 percent or below – but she said Russians have yet to be convinced that prices will remain stable. Interest rates, which were cut slightly on Friday to 8.25 percent, are being held high in Russia because consumer and business decisions are being driven more by inflation expectations than by actual inflation. “The population is accustomed to high inflation and doesn’t yet believe that it can stay low for a long period,” she said. “That is why our monetary policy remains strict.”

Sanctions “of course are not positive for the financial sector,” she added, though here too she said that Russian banks have done a decent job of compensating for the gap in lending that was left by the departure of international banks.

The financial sector also has other problems, related to speculation ahead of the 2007-2008 financial crisis. That crisis has led the banking sector to shrink from some 2,500 banks at the end of the 1990s to less than 600 today. Ms. Nabiullina said the central bank has been aggressively tackling the problem for the last four years, pulling some 350 licenses from banks with doubtful business models. “We will probably have to continue cleaning up for another one or two years,” she added.

Andre Ballin, Handelsblatt’s correspondent in Moscow, conducted the interview. Christopher Cermak, an editor currently based in Washington DC, contributed and adapted this story for Handelsblatt Global. To contact the authors: ballin@extern.handelsblatt.com and cermak@handelsblatt.com

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