March 13, 2013
For Putin's Central Bank Pick, Much to Prove
Elvira Nabiullina has the confidence and credentials as an economist to resist Kremlin appeals for looser monetary policy once she moves from Vladimir Putin's office to head the Russian central bank.
But for some, the president's choice — announced on Tuesday at the expense of frontrunners within the bank's existing management — signals the decline of a liberal economic policy elite that has dominated strategy since Putin rose to power 13 years ago and shows central bank independence only goes so far.
Either way, the 49-year-old will find herself, once she succeeds the widely respected Sergei Ignatyev in June, at the heart of a tussle between Putin's desire for economic growth and those who fear inflation could undermine investor confidence.
Admirers describe Nabiullina as an accomplished academic economist and experienced civil servant who has the self-assurance to speak truth to power — in private at least if not in public: "She is one of the people who isn't afraid to tell Putin what he doesn't want to hear," said Yevgeniya Albats, editor of opposition-minded newspaper New Times.
"There are very few people like that in Putin's circle," Albats told Ekho Moskvy radio.
Yet others say her background in the Economy Ministry — long the government's "department for growth" — equips Nabiullina poorly for the task of steadying Russia's oil-dependent economy and keeping the state-dominated banking system in line.
"It is hard to see what credentials Elvira Nabiullina ... has in order to run the Central Bank of Russia," commented Renaissance Capital economist Ivan Tchakarov.
In a sign that she is aware of starting in the role as an outsider, Nabiullina asked for Ignatyev to stay on as an adviser and Putin assented — an exchange captured by television cameras covering the president's announcement of the new bank governor.
But Vladimir Tikhomirov, chief economist at Otkritie Capital in Moscow, did not see the presence of Ignatyev after his retirement as an indication of continued central bank autonomy: "The Central Bank of Russia under her leadership would be seen by many as a department of the Kremlin administration and not as an independent voice," he said.
During Ignatyev's 11-year tenure, the central bank has quietly established itself as one of Russia's most respected economic institutions.
Investors and economists are especially impressed by the steps that Ignatyev has taken in recent years to embrace inflation targeting — a monetary policy framework, now orthodox in western countries, whereby central banks use the goal of low inflation as their central benchmark.
Nabiullina's appointment comes at a sensitive time, when the new policy regime, a work in progress that will be fully adopted by 2015, is facing its first real test.
Despite a barrage of criticism, including from within the government, the central bank has steadfastly refused to cut interest rates as long as inflation — presently running above 7 percent — remains well above its target ceiling.
Few expect to see any imminent change of heart. Most forecasters are sticking to their view that there will be no change in rates at the central bank policy meeting on Friday.
But there are rising expectations of rate cuts in the second half of the year, with many analysts now predicting that they will be larger, and perhaps sooner, than previously anticipated.
The danger for those who see benefits in its autonomy is that if the central bank eases up policy too readily, it will appear to be responding to political pressure from the Kremlin.
"The central bank has taken great strides towards credible inflation targeting," said Christopher Granville, managing director of Trusted Sources, an emerging market research firm in London.
"It's being tested by ... the economic slowdown, and obviously the political leadership is looking for relief," he said. "The question is whether they will jeopardize the credibility of the new framework."
Russia's economy grew by 3.4 percent last year, and its nominal gross domestic product of $2 trillion is on track to overtake the recession-bound economies of Italy, Britain and France in the coming years.
But that is not enough for Putin, whose first two terms as president saw growth averaging double that pace. The 60-year-old Kremlin leader, elected for a third term a year ago, needs faster growth to placate an increasingly restive middle class.
A further challenge facing Nabiullina will be overseeing and implementing the legal and institutional changes that are now needed to cement inflation-targeting.
While the central bank favors a clear mandate that focuses on the primary goal of fighting inflation, critics within the political establishment are pressing for a broader, and fuzzier, one that also emphasizes economic growth.
Since news of Putin's backing for his aide, the ruble has weakened slightly, while yields on long-term bonds — a measure of inflation expectations — have risen.
But for now, financial markets and most analysts are giving Nabiullina the benefit of the doubt. At least in terms of its formal strategy, the central bank priorities established by Ignatyev seem unlikely to change.
Nabiullina is expected to rely heavily on the advice of Ignatyev's existing team of deputies. One key leader responsible for monetary policy, Alexei Ulyukayev, has made clear that he intends to stay on.
"As head of the central bank," said Granville at Trusted Sources. "She'll tend to take the central bank's view, which speaks for reasonable continuity."