New Mr. Ruble Is Mr. Fixit of Russian Banks
A new man is now responsible for the ruble's fate at the Russian central bank -- Dmitry Tulin, a firm, cold-blooded professional who will strengthen the Russian monetary authority's already top-notch team. His appointment, however, will do nothing for Russia's sinking currency: It's about saving the country's banking system from the devaluation's consequences.
Formally, Tulin relieves First Deputy Governor Ksenia Yudaeva of responsibility for monetary policy. She will now concentrate on macroeconomic forecasting and strategy -- the natural domain for Yudaeva, whom Konstantin Sonin, one of the most influential liberal economists still living in Russia, extravagantly calls "the best-educated and most literate practical macroeconomist in Russia's 1,000-year history." Yudaeva earned her Ph.D. at the Massachusetts Institute of Technology and her academic work is still widely cited; making sense of what lies in store for the Russian economy as oil prices slide and external financing remains all but impossible because of a political stand-off with the West is a task worthy of her caliber.
But interacting with bankers and industrialists to make sure they don’t weaken the ruble any further through panicky currency trades and sweaty decisions about intervening in the currency market was never the best job for the scholarly, introspective Yudaeva. In 2014, Russia spent a record $103.75 billion to support the ruble, but it still lost 43 percent of its value against the dollar, and another 10 percent so far this month. Sergei Zhuravlev, a top Russian economic blogger, suggests that raising key rates in a more timely manner could have reduced the bleeding of reserves, but the Central Bank was too tentative, too indecisive. Even when it finally bumped the rate up to a staggering 17 percent, the ruble kept sinking because of a large-scale, underhanded deal to fund state oil company Rosneft, which was beyond the central bank's control.
One reason for Tulin's appointment is that the ruble might benefit from a firmer hand. He is an old pro, a man of action and a strong negotiator. Tulin has represented Russia at the International Monetary Fund and the European Bank for Reconstruction and development, run what is now Russia's second biggest bank, state-owned VTB, and done two previous stints at the Central Bank, one in the early 1990's and the other in the mid-2000s. The second time around, he was largely responsible for setting up Russia's remarkably strong deposit insurance system. Who better to stand up to the increasing pressure the Central Bank is facing from the Kremlin and business lobbies to spend less reserves and, at the same time, to start cutting the interest rate so as not to stifle the economy?
That, however, is not the main reason 59-year-old Tulin has been brought back from semi-retirement. (In recent years, he's been teaching and serving on boards of directors at banks and financial companies). Serving as a lightning rod in a no-win situation as the country's oil dependency continues to kill the currency would not have been very tempting.
During both of his central bank stints, Tulin was responsible for bank supervision. The last time he resigned, in 2006, was because the central bank's management had failed to act on his recommendations concerning a large bank that had fraudulently inflated its capital. The bank, Globex, went under in 2008 and had to be bailed out by the government. Tulin, in other words, is someone who knows the Russian banking system inside out -- both the people and the banks' financial profiles.
His appointment likely means Central Bank governor Elvira Nabiullina -- and the Kremlin, which approved the appointment -- believe monetary policy is now mainly about averting a banking crisis. Herman Gref, head of Russia's biggest bank, Sberbank, yesterday warned that $45 oil could be deadly for the Russian financial system. According to Sberbank calculations, such a low oil price -- and the ruble's commensurate low value -- will require forming additional reserves of 3 trillion rubles ($45.8 billion) in 2015. "That means," Gref said yesterday, "that the government will recapitalize banks and increase its stakes in them, and banks will buy industrial enterprises to turn into financial-industrial groups." Then, according to Gref, "all our economy will be -- the state."
It's a grim picture, but it appears inevitable if oil prices stay low. In that event, the central bank's job will be to see how much extra capital the banks will need to compensate for both currency-related and recession-related losses, and then to oversee the de-facto nationalization of the financial sector and its industrial debtors. If the oil price rebounds to $60 or $70, massive government intervention can be avoided with funding maneuvers and key rate manipulation. In either case, Tulin, with his intimate knowledge of the key players, will be in the right place at the right time.
In the process, his job may become more important than that of his ostensible boss, Nabiullina. But that’s not to suggest her job is in jeopardy -- high-profile dismissals have never been President Vladimir Putin's style. Besides, the Kremlin knows the central bank team is the best that could be assembled, and that it's doing all it can as Russia pays for its inability to diversify its economy during the commodities boom. In fact, Nabiullina's central bank is the last remaining stronghold of purely economic thinking in today's Moscow. It is in Putin's interest to preserve and fortify it as he continues his geopolitical ego trip amid the worst financial conditions Russia has faced since he came to power.
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