Volcker Invoked by Nabiullina to Fight Inflation Menacing Russia

Elvira Nabiullina has a message to all those questioning her central bank’s integrity: There’s more Paul Volcker than Vladimir Putin to Russia’s monetary policy.

At least that’s the person the Russian central bank governor looks up to as she wrestles with the fastest inflation in almost seven years and the most volatile currency in the world. Following in Volcker’s footsteps may seem like a tall task after the Bank of Russia’s unexpected cut in its benchmark interest rate last month, just six weeks after an emergency increase to 17 percent.

“I have a lot of respect for Paul Volcker, who was able to achieve a decline in inflation while guiding the country through a difficult period,” Nabiullina, 51, said in an interview Saturday with Bloomberg Television.

Nabiullina, who’s been blamed by politicians and business leaders for mishandling the currency crisis, made a case that the central bank’s credibility is intact after the surprise easing raised concern that policy makers acted under political pressure. Volcker, chairman of the Federal Reserve from 1979 to 1987, drove the benchmark interest rate to 20 percent to tame price pressures generated by oil shocks, sending the U.S. economy into a tailspin.

Russia’s economy is tilting into its first recession since 2009, bleeding capital, undermined by last year’s plunge in oil prices and squeezed by sanctions over the conflict in Ukraine. Inflation in January jumped to 15 percent from a year earlier. In the past decade, inflation peaked at 15.1 percent in 2008 and previously surpassed that level in 2002.

Nabiullina, a former economy minister in Putin’s government, became the first female central bank governor in the Group of Eight after replacing Sergey Ignatiev in June 2013.

‘Absolutely Unambiguous’

“When we made the decision to cut rates, we didn’t do it at the expense of inflation, to the detriment of our task of reducing inflation,” Nabiullina said. “The experience of other countries is absolutely unambiguous in this sense -- attempts to spur economic growth through increasing inflation, by way of turning on the monetary pump, have the opposite effect.”

Last month’s rate cut to 15 percent was among the most abrupt policy reversals by major central banks since 1990. It also raised questions about the move’s timing and whether the central bank fell victim to political pressure.

Only one of the 32 analysts surveyed by Bloomberg had anticipated a rate cut.

Nothing New

“There’s a lot of criticism of the central bank, but it’s used to it, because there are interest groups in the economy -- some benefit from a weak ruble, others favor a strong currency,” Nabiullina said. “In the course of many years, the central bank is criticized from one side and then the other. So we are accustomed to it.”

The rate decrease didn’t contradict the central bank’s goal to restrain price growth to 4 percent in the medium term, according to Nabiullina.

Derivative traders and analysts are both predicting more easing. The three-month MosPrime rate, which large Moscow banks say they charge one another for ruble deposits, will drop 86 basis points, or 0.86 percentage point, in the next three months, forward-rate agreements tracked by Bloomberg show. The Bank of Russia’s next move will be a reduction, according to 30 of 33 economists surveyed by Bloomberg, with 70 percent forecasting the move by the end of April.

Central bankers in Moscow have signaled that they are committed to battling inflation even as they also focus on tempering an economic slump that threatens to destabilize the financial industry. Nabiullina said she saw no threat to the central bank’s autonomy on policy.

“The central bank’s independence is defined by the country’s constitution and we are carrying out our mandate,” she said. “When making decisions, we are proceeding on the basis of an assessment of the current situation, objective factors and our forecasts.”

Before it's here, it's on the Bloomberg Terminal.