Vladimir Putin has to swal­low some strong medicine from his cen­tral bank


WITH Rus­sia’s econ­omy bat­tered by eco­nomic sanc­tions and plung­ing oil prices, Pres­i­dent Vladimir Putin has al­lowed the cen­tral bank to ad­min­is­ter strong medicine, sharply rais­ing in­ter­est rates even as it freed the rou­ble to float.

Such tough mea­sures may well help push the coun­try deeper into re­ces­sion next year, but have so far staved off fi­nan­cial panic, run­away in­fla­tion or a cur­rency melt­down like the one that helped cat­a­pult Putin into power in the 1990s.

Those who follow the cen­tral bank say the hawk­ish moves are a re­sult of Putin, known for closely man­ag­ing Rus­sia’s ma­chin­ery of power, giv­ing the bank’s tech­nocrats free rein.

“There is on­go­ing crit­i­cism of the cen­tral bank and of the whole gov­ern­ment be­ing Putin’s lap dog,” said a high­ranked gov­ern­ment source. “But all things con­sid­ered, the cen­tral bank is now much more au­ton­o­mous than it is broadly per­ceived.”

The high in­ter­est rates will hurt. The Euro­pean Bank for Re­con­struc­tion and De­vel­op­ment says re­ces­sion is cer­tain, pre­dict­ing 0.2 per­cent con­trac- tion for the full year of 2015.

Politi­cians have grum­bled. Econ­omy Min­is­ter Alexei Ulyukayev sent a let­ter to the Krem­lin urg­ing greater “co-op­er­a­tion” be­tween the bank and the gov­ern­ment, viewed as a plea for looser pol­icy.

“There is a ten­sion be­tween the gov­ern­ment and the cen­tral bank as re­gards growth.

“The ef­fect of th­ese sta­bil­i­sa­tion poli­cies is go­ing to be to deepen the re­ces­sion,” said Christo­pher Granville, the man­ag­ing di­rec­tor of Lon­don­based con­sul­tancy Trusted Sources.

Putin him­self has com- plained about high bor­row­ing costs. But so far, he seems to trust the hawk­ish instincts at the bank.

“What the cen­tral bank is do­ing is in line with what the lead­er­ship wants, in a strate­gic way,” said Granville. “Sta­bil­ity is the ab­so­lute top pri­or­ity, rather than avoid­ing neg­a­tive growth at all costs.”

Still, there is al­ways a chance that Putin can change his ap­proach. The re­marks he made on Tues­day hinted as much.

Speak­ing to Fi­nance Min­is­ter An­ton Silu­anov, he called for “team­work be­tween the cen- tral bank and the gov­ern­ment”.

Ex­change rates are an ob­ses­sion for Rus­sians since the 1990s, when hy­per­in­fla­tion after the fall of the Soviet Union wiped out the fi­nan­cial sys­tem, de­stroyed sav­ings and brought the econ­omy to its knees.

A sec­ond cur­rency col­lapse and a de­fault in 1998 pro­pelled Putin into power the fol­low­ing year, and a sta­ble rou­ble has been one of the most prized achieve­ments of his rule ever since. Putin him­self makes much of the cen­tral bank’s in­de­pen­dence.

“We – from the ex­ec­u­tive power level – do not med­dle in the pol­icy of the cen­tral bank,” he said this month when meet­ing IMF [In­ter­na­tional Mon­e­tary Fund] head Chris­tine La­garde. “The cen­tral bank, in ac­cor­dance with the law, con­ducts an in­de­pen­dent pol­icy. But of course we look care­fully at what is hap­pen­ing.”

The cen­tral bank said its in­de­pen­dence, “one of the fun­da­men­tal prin­ci­ples in un­der­stand­ing of mon­e­tary pol­icy”, was en­shrined in the con­sti­tu­tion. – Reuters

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