Britain’s The Banker magazine has named Russian Central Bank Chair Elvira Nabiullina Europe’s Central Banker of 2016.
The award is being linked to the Russian Central Bank’s success in bringing inflation in Russia down from 12.7% in 2015 to a post-Soviet low of below 6% in 2016 (the actual final figure will probably be 5.5% or 5.6%).
It is a matter of public record that I think that Nabiullina’s high interest rate policy has been unduly harsh, and that it has prolonged Russia’s recession. I also think that the single-minded focus on bringing inflation down to an annualised rate of 4% by the end of 2017 is over-ambitious, and that damage is being done to the real economy in order to achieve it.
Having said this, The Banker’s award does offer a rare recognition not just of the level of economic competence of Russian officials, but also of the fact that inflation reduction not GDP growth is their current priority.
On the question of GDP growth, early indications are that it might be higher this year than earlier forecasts had predicted, with evidence in the final quarter of 2016 that the economy was recovering more strongly than expected. Former Finance Minister Kudrin, a consistent pessimist about the Russian economy from within the government who is however also Nabiullina’s strong ally, is now predicting GDP growth to rise to 3.5% by 2019, reaching the target rate of 4% by 2021.
One point I would make: the current rapid inflow of funds into Russia – with foreigners buying $727 million of Russian stocks in 2016, of which the bulk came in the last two months of the year – is a mixed blessing.
One effect of this sudden inflow of funds is that it is causing the rouble to strengthen (it fell below $60 today for the first time since July 2015), which is bad both for the budget and for the economy’s overall competitiveness.
Whilst this flood of money is a vote of confidence by the international investment community in Russia and its economy, reflecting optimism about the fall in inflation and the ongoing recovery, much of it also looks like hot money, attracted to Russia as much by the high real interest rates there as by optimism about the economy and the still very limited rise in oil prices, as well as by the election of Donald Trump.
Hot money is notoriously foot-loose, and is capable of leaving Russia as quickly as it comes in, causing significant problems in its wake. Suffice to say that the fact that there has been this sudden rush of money into Russia is in my opinion a further good reason to cut interest rates now.
Having said this, it is – or ought to be – another nail in the coffin for the credibility of those prophets who not so long ago were confidently and gleefully predicting that investors were heading panic stricken for the exits and that Russia was going to run out of money.