The ‘deal’ between Putin and Nabiullina failed, what changes for the Russian economy (and for the war)

The contradictions e the paradoxes of the economy in Russiabut also its substantial estate, since the invasion of Ukraine, have a name and a surname. It’s not the most obvious one Vladimir Putin but that of Elvira NabiullinaGovernor of the Russian Central Bank. The economist has training and a personal history that immediately put her in the very uncomfortable position of having to save with the few tools available a house of cards, made up of galloping inflation, Western sanctions, increasingly significant imbalances in the fundamentals , employment and quality of life of Russian citizens in constant decline.

Up to now, Nabiullina has played her game by imposing a rational use of monetary policy, resorting to repeated increase in interest ratesup to the current 21%, to counteract the otherwise uncontrollable rise in prices. The significant element, up to now, has been the stability of an unwritten pact which allowed it, despite the propaganda and discontent of oligarchs and the military, to maintain a coherent course with difficult navigation but within the framework of the economic doctrine. A pact that Putin honored not for an unconditional credit opening, nor even for a particular sympathy towards Nabiullina, but because the progress of the war in Ukraine, and the belief of being able to achieve a victory on the field, advised him that minimum of caution necessary to maintain a proven economic system but with a technically possible recovery prospect in the medium term. Nabiullina, moreover, has so far been the only person in whom Putin has recognized the competence and specific weight that have allowed her to remain in her post, practically without the right to resign, despite the repeatedly dissident voice, starting from the assessment of whether to invade Ukraine.

Today that pact seems to have fallen through. Although the Russian Central Bank had already anticipated the need to further raise interest rates, continuing to give monetary policy the restrictive push necessary to prevent the economy from being overwhelmed by the concomitant grip of out-of-control inflation and negative growth, Nabiullina raised white flag and stopped. Evidently, the pressure exerted on her by Putin’s apparatus was too strong oligarchies that are continuing to enrich themselves through the warstarting from the giants of steel, aluminum and the entire arms industry. The decision to comply with the requests, or rather with the impositions of the Kremlin, is written in the note from the central bank which decided to leave the cost of money unchanged. Core inflation rose between October and November to 10.9%, a very relevant threshold also considering that the official estimates are already much lower than those of the very few independent bodies that still have access to the data in Russia, but it has chose not to move accordingly. Further confirmation of the turning point came from Putin’s words during the ‘river’ conference at the end of the year. Two key messages: “War is good for the economy” and “there are other ways to fight inflation other than increasing interest rates”.

Putin becoming an economistand which effectively disavows Governor Nabiullina, could be a key step in understanding the Kremlin’s next moves. The consequences may be significant not only for the developments of the war in Ukraine but also for the posture that Russia will be able to take on the international scene even in the post-war period with Kiev. A Russia definitively handed over to the war economywithout a possible reconversion of strategic and production choices in reasonable terms, would have only one chance of survival with Putin in power: to continue waging wars on all possible fronts. This is why the signals of recent days are particularly negative and this is why the fate of Elvira Nabiullina, who has so far managed to maintain her position and a sufficient level of autonomy to have an impact, will have a significant impact on the precarious balance of the Russian economy and on the residual hopes of a ‘normalisation’ of Kremlin policy in post-Ukraine.