Putin’s Aide Blames Central Bank for Weaker Ruble, Inflation

Kremlin economic aide Maxim Oreshkin blamed the central bank for contributing to declines in the ruble, an unusual rebuke made public just moments before the Russian currency broke through 100 to the dollar for the first time since March last year.

(Bloomberg) — Kremlin economic aide Maxim Oreshkin blamed the central bank for contributing to declines in the ruble, an unusual rebuke made public just moments before the Russian currency broke through 100 to the dollar for the first time since March last year.

Writing in a rare column published by state news agency Itar-Tass on Monday, President Vladimir Putin’s chief economic adviser said “the source of the weakening of the ruble and the acceleration of inflation is soft monetary policy.” 

The public airing of grievances hints at discord in the highest echelons of the Russian establishment over how to respond to a crash in the ruble that pulled it to levels last seen weeks after the invasion of Ukraine in February 2022. 

The outcry has spread as the ruble plunged in recent days, with a prominent Kremlin propagandist saying during a broadcast that “we are being laughed at” from abroad. 

Andrei Klishas, a senior lawmaker, said Monday on his Telegram channel that the central bank needs to understand “the exchange rate is not only an economic indicator” but also “has a significant impact on the social rights of our citizens.”

Bank of Russia Governor Elvira Nabiullina has singled out the deterioration in foreign trade as the main reason for the currency’s weakness and attributed faster inflation to heavier government expenditure and labor shortages caused by the costly war effort.

On Monday, the central bank repeated that it currently doesn’t see any threats to financial stability from the ruble’s performance and allows for the possibility of raising interest rates at its coming meetings. 

The value of exports is facing a “significant reduction” at a time when demand for imports is on the rise against the background of elevated government spending and also as a result of fast lending growth, it said in a statement.

What Bloomberg Economics Says…

“With the pass-through to consumer prices peaking at around six months after the exchange-rate shock, consumers’ confidence will likely be at its worst around the presidential elections of March 2024. As economic activity returns to pre-war levels, we expect the central bank to have space to raise rates by at least 100 basis points as soon as Sept. 15, pushing the policy rate to 10% or above by the end of the year.”

—Alexander Isakov, Russia economist. For more, click here

In what amounted to a defense of government policies, Oreshkin said authorities “managed to stabilize the budget situation” and expect to run a surplus in the third quarter, with the year-end deficit seen in line with the planned 2% of gross domestic product.

In the remainder of the year, the amount of extra proceeds from oil and gas sales will reach about 800 billion rubles ($8 billion) above a baseline level in the budget, allowing the government to rely less on its wealth fund to cover the fiscal deficit, he said.

Instead, Oreshkin pointed to a much faster acceleration in lending to households and companies as a key reason for swelling the money supply. 

Russia needs “a strong ruble,” since a weak currency “complicates the structural transformation of the economy and negatively impacts real incomes of the population,” he said.

“The current exchange rate has deviated significantly from fundamental levels,” he said. “The central bank has all the necessary tools to normalize the situation in the near future and ensure that lending rates are reduced to sustainable levels.”

At Loggerheads

The view appeared at odds with the position of the central bank, which has said it continues to abide by a floating exchange-rate policy. The approach “allows the economy to adapt effectively to changing external conditions,” Bank of Russia Deputy Governor Alexey Zabotkin told reporters Friday. 

“The Bank of Russia does not set any quantitative targets for the ruble exchange rate — and it’s in that sense that the exchange rate is floating,” he said. 

The ruble has depreciated for six straight months, losing over 26% against the dollar this year in one of the worst performances in emerging markets. 

The central bank has so far responded by raising its key rate to 8.5% from 7.5% in July. Last week, it also halted buying foreign currency on the domestic market under a budgetary mechanism designed to insulate the economy from swings in commodity prices. It’s next scheduled to review rates on Sept. 15.

The suspension of foreign-exchange purchases “has failed to stabilize the currency,” according to JPMorgan Chase & Co., which now expects the central bank to raise its benchmark to 10% by the end of the year, up from its previous call for 9%.

Rosbank said in a report that faster rate hikes or a tightening of capital controls are among likely countermeasures. 

“The current rhetoric of the authorities doesn’t indicate readiness to promptly intervene in trading,” Rosbank’s analysts said. “As a result, there’s no immediate impetus to stop the ruble’s trend toward weakness.”

(Updates with analyst comments in final three paragraphs.)

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