Why Ottawa took the extraordinary step of imposing sanctions on the head of Russia’s central bank

Opinion

Hey there, time traveller!
This article was published 21/04/2022 (1236 days ago), so information in it may no longer be current.

On Tuesday, Canada imposed personal sanctions on Elvira Nabiullina, governor of Russia’s central bank, for her role in Russia’s attack on Ukraine.

Ottawa also announced sanctions on 13 other “close associates of the Russian regime” in a new round of harsh measures against individuals and entities tied to Russia’s invasion of Ukraine.

It is highly unusual to hold a central banker of a major industrialized country in such odium. Australia has also personally sanctioned Nabiullina.

So, here’s why Ottawa took that extraordinary step.

Nabiullina’s job is to cushion the blow for 145 million Russians suffering the punishing impact of thousands of Western economic sanctions against their country triggered by Russia’s war on Ukraine.

And in doing so to prop up the regime of Vladimir Putin, the Russian president, by convincing Russians that their wounded economy will soon recover.

But as you will have guessed, that project is not going well.

Russians are coping with an inflation rate expected by Nabiullina’s Bank of Russia to average about 20 per cent this year, more than four times the abnormally high rate of price increases in Canada.

The Bank of Russia forecasts that Russia’s economy will shrink by about 10 per cent in 2022. That’s roughly the same rate of Russian economic decline at the time of the Soviet Union’s collapse three decades ago.

Nabiullina has acted rapidly on several fronts to arrest the economic free fall.

The Western sanctions applied immediately after Russia’s Feb. 24 invasion of Ukraine caused the ruble, the Russian currency, to lose almost 50 per of its value.

The sanctions impaired Russia’s ability to import and export goods and to conduct financial transactions with non-Russian institutions.

As a result, in the first weeks of the Russia’s war on Ukraine, inflation in Russia was running at roughly two per cent per day, or about 180 per cent per year.

Nabiullina, 58, Russia’s central banker since 2013, put a relatively quick end to the hyperinflation with the expedient of more than doubling the central bank’s key lending rate, to 20 per cent.

In its own effort to combat inflation, the Bank of Canada recently doubled its key rate — to one per cent.

Raising borrowing costs is a traditional remedy for inflation and for raising the value of a nation’s currency.

But Nabiullina has gone to extremes, risking a sharp and lengthy economic slowdown with such high borrowing costs.

Nabiullina also imposed capital controls to boost the ruble’s value.

Russian businesses were ordered to convert 80 per cent of their foreign-denominated revenues into rubles.

And a cap was placed on withdrawals from foreign-currency bank accounts. That was a hardship for Russians who have long tried to protect themselves from currency crises by keeping a large portion of their savings in euros and U.S. dollars.

By early April, those and other Draconian measures had restored the ruble to roughly its pre-war value.

But Nabiullina’s remedies are both temporary and are diminishing Russia’s long-term growth prospects.

Nabiullina has effectively dismantled the Western economic integration she painstakingly built as governor before the war. Her actions have compounded the economic isolation inflicted by Western sanctions.

Nabiullina’s peers at European and U.S. central banks warn that the high interest rates supporting the ruble will start pushing Russian firms into bankruptcy later this year.

And that’s ahead of planned further Western sanctions.

The most important of those is an end to the $1.1 billion (CND) that member countries of the European Union (EU) send to Russia each day for its oil and gas.

The EU is scrambling to end its use of Russian fossil fuels by 2024, having already banned Russian coal imports earlier this month.

The EU, the biggest market for Russia’s mainstay export, is under fire for not pulling the plug on the Russian economy by now.

But it will do so over the next three years, by resourcing its oil and gas needs and by ramping up its wind, solar and nuclear capacity. For Russia, that will be a permanent massive loss of revenue.

As Italian PM Mario Draghi said last weekend, Europe must curtail its use of Russian oil and gas and end its vulnerability to Russian “political subjugation.”

As to Nabiullina, she has not openly supported the war in Ukraine, as so many high-ranking Russian officials have.

But Nabiullina is a Putin loyalist, for 20 years one of his few trusted advisers. And in Ukraine crisis she has been zealous in trying to protect Putin’s interests.

Michael McFaul, a former U.S. ambassador to Russia, was among the first to call for Nabiullina to be sanctioned.

On March 16, McFaul tweeted that “More than any single person, she is helping to finance Putin’s heinous war. (I had hoped she’d have the courage to resign, but she’s made a different choice.)”

Over the years, some central bankers have been regarded with contempt for their real or alleged incompetence.

But held in odium, this might be a first.

David Olive is a Toronto-based business columnist for the Star. Follow him on Twitter: @TheGrtRecession