Dangerous medicine

Russia’s business community has remained largely silent over the past two years, even as Western sanctions triggered a surge in real interest rates. In recent weeks, however, business leaders have openly criticised Central Bank Governor Elvira Nabiullina, who has held her post since 2013 and reportedly sought to resign at the start of the war in 2022.

While Nabiullina’s position appears increasingly precarious, the Kremlin continues to insist that the sanctions have only strengthened the economy, making it more self-sufficient. This claim is patently false, as evidenced by Russian officials’ repeated calls for the West to lift its restrictions. In fact, since Russia’s 2014 annexation of Crimea, economic sanctions have triggered three major exchange-rate crises: in March-April 2014, February-March 2022, and July-August 2023. Each time, Nabiullina managed to contain the fallout by hiking interest rates.

But things have changed. On 25 October, the central bank raised its key interest rate from 19% to 21%, citing inflation concerns. In its statement, the bank noted that “inflation expectations continue to increase” and that growth in domestic demand was “significantly outstripping” the economy’s capacity to expand the supply of goods and services. The statement added that increased government spending and the growing budget deficit have “pro-inflationary effects,” necessitating further monetary tightening.

With official inflation at 9% and a real interest rate of 12%, Russia’s long-dormant economic-policy debate is heating up. But the dominant voices are no longer those of actual economists, because most independent experts have fled the country to avoid imprisonment. Instead, three prominent oligarchs have recently spoken out against the central bank’s interest-rate hikes.

While the outspoken Oleg Deripaska’s criticism was hardly surprising, Alexey Mordashov, who owns the Severstal steel conglomerate, typically chooses his words carefully. In late October, Mordashov acknowledged that “the need to raise rates to limit inflation is clear” but warned that Russia was “coming to a situation where the medicine may become more dangerous than the disease”.

Both Deripaska and Mordashov have broad support among Russia’s business elite. But the real shock came last month when Sergey Chemezov, CEO of the state-owned weapons and technology giant Rostec, rebuked Nabiullina in a speech before the Federation Council, Russia’s upper legislative chamber, arguing that repeated rate hikes would lead to the bankruptcy of most enterprises.

Chemezov also warned that elevated interest rates might force Rostec to halt exports of high-tech products. Several other prominent business figures have voiced similar concerns, marking the first time since Vladimir Putin launched Russia’s war against Ukraine that he has faced open opposition to his economic policies.

Since 2004, Putin and his cronies have amassed fortunes by rigging public contracts and systematically stripping the energy giant Gazprom’s assets, as documented by the late Boris Nemtsov and Vladimir Milov in their 2008 booklet Putin and Gazprom. But European sanctions have turned Gazprom’s once-enormous profits into huge losses, diminishing the financial clout of Putin’s longtime allies — the “Gazprom parasites”, including Mikhail and Yury Kovalchuk and Gennady Timchenko.

As Milov recently argued, Chemezov has emerged as the dominant figure among Putin’s business allies. Despite having few qualifications beyond his past KGB service alongside Putin in Dresden, he has leveraged this relationship to secure control of Russia’s armaments industry, now consolidated under the company Rostec, which, backed by federal funding (though its finances remain a state secret), oversees roughly 80% of Russia’s defence production.

Chemezov is also a major beneficiary of the war in Ukraine and has benefitted from recent shifts in government personnel, most notably, the dismissal of Defence Minister Sergey Shoigu, meaning that Shoigu no longer dares to complain about Rostec’s substandard products. Meanwhile, Chemezov’s top protégé, Denis Manturov, has been promoted to first deputy prime minister. Both Manturov and Alexey Dyumin, another Chemezov ally, now hold seats on the powerful Security Council.

I knew Nabiullina in the 1990s, when she was a widely respected member of Russia’s liberal camp. In 2013, a fierce struggle erupted within Putin’s inner circle over who would lead the Central Bank — a liberal or a statist. The main contenders were Alexey Kudrin, Russia’s liberal former finance minister, and the statist hardliner Sergey Glazyev. As Putin’s economic adviser at the time, Nabiullina led the liberals to victory, aided by Putin’s lingering fear of a repeat of the 1998 financial crash that brought down Prime Minister Sergey Kiriyenko’s government.

Nabiullina’s current priorities seem to be to control inflation, reduce capital flight, stabilise the ruble, and support GDP growth, which is projected to fall to 0.5-1.5% in 2025, down from this year’s expected 3.6% rate. But, having failed to curb inflation, she will likely be dismissed. Her trusted first deputy, Ksenia Yudaeva, was demoted in 2023 and reassigned to the International Monetary Fund. At the recent BRICS summit in Kazan, Putin even made a cruel joke at Nabiullina’s expense, leaving her visibly distressed.

The question now is whether Putin will replace Nabiullina with an unqualified loyalist who will slash interest rates, allow inflation and capital outflows to surge, and send the ruble into a tailspin. Given that Russia’s economic crisis is a direct consequence of Putin’s invasion of Ukraine and the subsequent Western sanctions, the only way to stabilise Russia’s economy is to end the war and pull its forces out of Ukraine.