How Russia's central bank is fighting back against sanctions : The Indicator from Planet Money Heavy sanctions on Russia have forced Central Bank of Russia Governor, Elvira Nabiullina, to get creative. What steps is she taking to keep Russia's economy afloat?

The blunt weapons of Russia's central bank

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And I'm Paddy Hirsch. When a country is attacked militarily, it's all about the generals and the field marshals who move troops and other military assets around in order to defend the motherland. When the attack is financial and economic, however, the onus falls on the defending country's finance chiefs and, in particular, the head of the central bank.

WOODS: Russia may be the aggressor in Ukraine, but it is playing defense in the much larger conflict unleashed by sanctions imposed by a group of countries, including the U.S., the U.K. and the EU. Now all eyes are on Elvira Nabiullina, the governor of the central bank of Russia, as she makes moves to shore up her country's currency and tries to save its economy.

HIRSCH: On today's show, we look at the role of the central banker and at the weapons and ammunition they can bring to the economic fight, coming up after the break.


WOODS: The sanctions on Russia are aimed at doing two things: No. 1, preventing Russia from using a big chunk of its own foreign currency reserves, particularly the dollar, and, No. 2, restricting it from bringing in many more new dollars or euros or pounds into Russia. Rodney Ramcharan is a professor of finance and business at the Marshall School at USC.

RODNEY RAMCHARAN: The loss of access to foreign dollars or to dollars puts the central bank in a particular bind in conjunction with the depreciation of the ruble.

HIRSCH: The ruble, Russia's currency - it dropped 30% last week, and Russians panicked, storming their banks, trying to get their money out before it devalued further. Enter Elvira Nabiullina, the governor of the central bank of Russia.


ELVIRA NABIULLINA: (Non-English language spoken).

HIRSCH: Elvira Nabiullina has been governor of the central bank of Russia since 2013. Before that, she was Vladimir Putin's economic adviser. She's 58 years old and likes to wear brooches for her public appearances that reflect, in general terms, how she's feeling about the economic situation at the time.

WOODS: And she's pretty creative. Like, when she cut interest rates in June of 2020, she wore a pin of a dove, and when she raised rates the following March, she wore a hawk. And when the pandemic was in full swing, she wore a brooch of a house. Please stay at home, she said at the end of her news conference.

HIRSCH: In her most recent appearance, however, after the invasion of Ukraine, she wore all black and no brooch at all.

WOODS: In the U.S., the central bank's job is to keep a handle on inflation and unemployment. In Russia, it's also focused on reining in inflation, but its secondary role is to maintain a healthy domestic credit market, aka keeping the banks liquid and lending.

HIRSCH: Inflation, though, is the biggie. And in Russia, it's in danger of running out of control. Rodney Ramcharan notes that Russia imports pretty much all of its consumer goods. As a result, as the value of the ruble has fallen, pretty much everything has become more expensive to buy.

WOODS: To fight that inflation, Elvira Nabiullina would usually use the central bank's overseas accounts. The problem is, though, many of those accounts are now frozen. Rodney Ramcharan says that these accounts are stuffed with treasuries and other assets that can, in normal times, be sold quickly and easily.

RAMCHARAN: Typically, a central bank would use these things to support its currency. So it would liquidate its holdings of U.S. treasuries to buy the ruble to keep the ruble from falling in value. With the loss of access, the ruble no longer has a flow, and so it's going to continue - it potentially could continue to plummet.

HIRSCH: The sanctions have also made it hard for Elvira Nabiullina to keep her country's banks liquid and lending. As we mentioned before, Russians are rushing to get their money out of the banks, but the banks only keep a small amount of cash on hand. If Russians demand more than the banks have available, the banks have to start selling the loans that they've made to businesses.

RAMCHARAN: And if all banks are selling loans at the same time, then you get into gigantic problems of fire sales, where the loans are sold off quite cheaply, and the banks begin to crash at that point.

HIRSCH: It's sometimes said that central bankers have to conduct highly sensitive operations with brutally blunt instruments, kind of like doing open-heart surgery with an ax and a machete.

WOODS: It's not going to end well.

HIRSCH: It's certainly not easy. But you know what? Sometimes, it's good to have an ax.

WOODS: Elvira Nabiullina has swung her ax at the lending problem by rapidly doubling interest rates a huge amount, hoping to dissuade people from withdrawing their money from the bank. She's doing a lot of emergency lending to banks, and she's letting them delay revaluing all their assets, keeping these assets artificially high.

HIRSCH: A little bit of creative accounting.

WOODS: That is right. And all of this is aimed at keeping the banks solvent and forestalling any need to start selling off loans.

HIRSCH: Yes. And next, she swung her machete at the inflation issue. Remember, the sanctions are preventing her from selling more than 50% of Russia's overseas reserves to support the currency, so now she's trying to prop up the ruble using other means.

WOODS: So she's ordered Russian companies who export goods to have to buy rubles with 80% of any foreign currency that they make. She's also limiting the ability of people who aren't Russian residents to withdraw money, and she's restricting Russians' ability to get cash out of the country. She's stopping overseas bank transfers. So if they can't take it out of the country, then maybe they'll convert it into rubles and spend it at home instead.

HIRSCH: I think that's the plan 'cause Elvira Nabiullina needs those greenbacks, baby.

WOODS: Yes, that is true.

HIRSCH: Yes indeed - and not just for propping up the currency. Many Russian banks have to pay interest on debt in dollars, and they rely on the central bank to supply those dollars to them. Rodney Ramcharan says the same goes for many Russian companies.

RAMCHARAN: A lot of the consumer goods and investment goods, quite frankly, are goods that they import on the world market. And when you're importing goods, you are typically invoiced in dollars, and so you need to have these dollars upfront.

WOODS: The Russian government has joined the fight by declaring a so-called capital amnesty for Russians living overseas. So now they can bring foreign currency into Russia, no questions asked about taxes or how the money was made.

HIRSCH: So these are all highly unusual and, in the last case, pretty dodgy measures.

WOODS: To say the least, yeah.

HIRSCH: And they're indications that the sanctions are working. But Rodney Ramcharan warns that sanctions won't hold forever.

RAMCHARAN: The short thing I would say is that sanctions are effective in the short run. Eventually, people find ways to evade these things. It's a cat and a mouse game.

WOODS: The U.S. has already begun tightening the screws by banning Russian oil imports, and the EU is discussing reducing its dependence on Russian natural gas by two-thirds.

HIRSCH: Ramcharan says this is vital. He says the exclusion of oil and gas from the sanctions would be a key loophole that Russia could exploit by reclassifying key goods.

WOODS: Russia might also find a way to leverage its relationship with China, he says. It might run its exports and imports through Chinese companies, assuming Putin hasn't already destroyed his relationship with Xi Jinping.

HIRSCH: But whatever strategy Russia adopts, it will be Elvira Nabiullina's job as central banker to keep the lights on and the motor running by manipulating interest rates, making loans to banks and vacuuming up every damn dollar she can get her hands on.


WOODS: This episode was produced by Nicky Ouellet and engineered by Gilly Moon. It was fact-checked by Corey Bridges. Our senior producer is Viet Le, and our editor is Kate Concannon. THE INDICATOR is a production of NPR.


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