Russia

TRUSTED AIDE: has nominated former economy minister Elvira Nabiullina, seen here with him in 2008, as head of ’s central bank. REUTERS/SERGEI KARPUKHIN Inside Putin’s central bank surprise The Russian president’s unexpected compromise over a new central bank chief exposes the powerful factional pressures he faces

By Douglas Busvine MOSCOW, March 22, 2013

“ t will be a surprise – you’ll like it,” President Vladimir Putin said with a smile when asked whether he had decided who should be next head of IRussia’s central bank. The former KGB spy said nothing more to reporters but the timing of his comment on March 7, the eve of International Women’s Day, sent a coded mes- sage that was quickly deciphered.

SPECIAL REPORT 1 Russia Inside Putin’s central bank surprise

ROUBLE RULER: From the central bank’s headquarters in Moscow, outgoing chairman Sergei Ignatyev has overseen a battle against inflation and a devaluation in the currency spurred by the global financial crisis.REUTERS/DENIS SINYAKOV

Before the holiday weekend was out his She is both trusted by Putin but accept- according to longtime political observers. top economic aide, Elvira Nabiullina, had able to his opponents. Her selection reflects A slowing economy and growing mid- emerged as the sole viable candidate after the growing challenges that Putin, now a dle-class discontent have deepened a rift months of intrigue and disinformation over year into his third presidential term, faces between Putin and his coterie of secret- who Putin would name to the coveted post. in sustaining the personalised system of service alumni known as the siloviki, or In an era when central bankers have rule he created after first succeeding Boris “men of power”, and the so-called “system come to be seen as the high priests of glob- Yeltsin in 2000. liberals” to whom he has always delegated al finance, creating money out of nothing, Although the Kremlin propagates an im- the fiscal and monetary management of Putin’s choice of the soft-spoken former age of Putin as a master string-puller at the Russia’s $2 trillion economy. economy minister delivered as big a sur- peak of a unified administration, in reality he The liberals’ standard bearer, Alexei prise to Kremlin watchers as did the elec- is more like a circus master trying to control Kudrin, ran budget surpluses, repaid debts tion of Pope Francis to the world’s 1.2 bil- factions that relentlessly vie for influence, and saved windfall oil revenues in a rainy- lion Roman Catholics. day fund during an 11-year term as finance Nabiullina’s name, derived from the (Putin) was sure that Kudrin minister until he was ousted in 2011. Arabic for “Prophet of Allah”, had not ap- would accept this position. Kudrin But a rising group of Kremlin econo- peared on any shortlist. It was precisely her rejected this proposal. It was a big mists is determined to mobilise state re- status as a non-candidate that defined the sources to crank up flagging economic 49-year-old ethnic Tatar as a compromise surprise for Putin. growth - including by slashing interest choice to head the Bank of Russia, say in- Sergei Aleksashenko rates, a move that would be anathema to siders and analysts. Former first deputy chairman of the central bank the inflation hawks who until now have

SPECIAL REPORT 2 Russia Inside Putin’s central bank surprise

been in charge of the central bank. Putin, 60, considered half a dozen Russia | Inflation other candidates before finally opting for Falling interest rates and inflation in the early 2000s helped Russia benefit from the Nabiullina, according to sources familiar global ‘great moderation’. But the economy started to overheat in 2007, with a rise in with the process. In choosing a trusted inflation turning real interest rates negative. When the crash hit in 2008, the cost of confidante, he has extended his influence credit to business soared, sparking a deep recession. but stopped short of provoking an open rift CORE INFLATION - CHANGE FROM PREVIOUS YEAR with the liberals. But it was a close call. “She is probably the most balanced person,” said Igor Yurgens, head of the Institute of Contemporary Development, 15% a think tank with close ties to , the former president who is now prime minister. Nabiullina “has the closest distance to the president. She can 10 influence him,” said Yurgens. Supporters describe Nabiullina as a skilled economist, administrator and nego- UNDER THE CURRENT tiator. They emphasise her role in drafting 5 CENTRAL BANK HEAD, the market reforms of Putin’s first term that INFLATION FELL BY supported Russia’s return to rapid growth after the trauma of the rouble devaluation 10.4PCT. PTS and domestic debt default of 1998. 0 “She’s serious and she’s smart,” said Martin Gilman, a former International RCB REFINANCE RATE AVERAGE 1-YEAR BUSINESS LOAN RATE Monetary Fund staffer who heads the Centre for Advanced Studies at Moscow’s Higher School of Economics. 20% Others are less complimentary, saying Nabiullina exerts tight control over her subordinates and focuses on managing up- 10 wards rather than outwards - weaknesses in a central bank boss who needs to be a good 0 delegator and an adept communicator. Where policy makers and economists 2002 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 agree is that Nabiullina is a compromise Source: CBR, Reuters choice, lacking independence compared with the central bank’s current head, Sergei Ignatyev, who retires in June after people who would understand how things who does her homework and solicits views. 11 years in the job. need to be done, as a professional, but re- She knows her stuff.” “Putin and Medvedev perceived Ignatyev alises that if the Kremlin wants something KUDRIN’S REJECTION as someone who can take responsibility for different, this is what must be done. End what he says or does. His recommendations of story.” Putin’s “you’ll like it” remark had a familiar were in a way seen as an instruction man- Nabiullina declined to comment, but ring - he used exactly the same phrase when ual,” said one senior administration official Gilman defended her independence. he was prime minister in August 2011, the who requested anonymity. “Nabiullina takes the responsibility of pub- month before he announced he would run “Will Elvira have this authority? I doubt lic policy very seriously,” he said. “She is again for the presidency. it,” the official added. “She is one of those appreciated within the elite as a technocrat On Sept. 24, 2011, when Putin

SPECIAL REPORT 3 Russia Inside Putin’s central bank surprise

$500 billion Approximate current level of Russia’s foreign currency reserves

Source: Russian central bank

Putin, Kudrin’s rejection of the president’s CONTROVERSIAL CONTENDER: Sergei Glazyev, offer challenged the code of loyalty Putin OTHER PLANS: Former finance minister Alexei an economist whose views prompted calls for relies on to control Russia’s bureaucracy. Kudrin rejected Vladimir Putin’s offer to nominate looser central bank policy to boost growth, was Asked about Kudrin’s political future at him as head of the central bank, but remains a considered as bank chairman but opposed by a televised call-in show not long after the powerful political influence .REUTERS/JO YONG liberal factions. REUTERS/SERGEI KARPUKHIN election, Putin’s discomfort was palpable. HAK “Alexei Leonidovich Kudrin has not left my team. We are old comrades, he’s my announced that he would swap jobs with friend,” he said. financial and economic mainstream. Medvedev, his partner in Russia’s rul- Putin had miscalculated, says economist His views soon gained influence, inspir- ing tandem power structure, then Finance Sergei Aleksashenko, who in the 1990s ing increasingly strident official calls for Minister Kudrin was 5,000 miles (8,000 served as a deputy finance minister and later the central bank to ease policy to bolster km) away in Washington D.C. and most as first deputy chairman of the central bank. growth that, at 3.4 percent last year, was certainly did not like what he heard. Offbase “He (Putin) was sure that Kudrin would around half the average rate of Putin’s first at the autumn meetings of the International accept this position,” said Aleksashenko. two terms. Monetary Fund and World Bank, Kudrin - “Kudrin rejected this proposal. It was a big Russia’s liberal establishment recoiled at said to harbour prime ministerial ambitions surprise for Putin. Then he started to look the rise of Glazyev, who is on the record of his own - summoned reporters to a brief- around for who he could rely on.” accusing the West of conspiring to turn ing and declared that he would not serve in Russia into an economic colony and who BATTLE OVER POLICY a Medvedev-led government. once described the Russian central bank as His remarks caused a furore. Medvedev Putin’s attention turned to Sergey Glazyev, a branch of the U.S. Federal Reserve. demanded Kudrin’s head and the finance a Soviet-educated economic prodigy and “A person who argues in all seriousness minister promptly found himself out of a job. former rival. Glazyev ran against Putin for that the United States and Europe are is- After the ruling party won the December president in 2004 and, before losing heav- suing money so that they can grab Russian 2011 parliamentary election with a reduced ily, accused the Russian leader of running a assets on the cheap can be anyone as long majority, Putin offered the post of central “corrupt and irresponsible regime”. as he is healthy; just not an economist,” bank chairman to Kudrin, an old ally who But in February 2012, a month before the Anatoly Chubais, the architect of Russia’s back in 1996 had helped Putin get his first presidential election, Glazyev had thrown 1990s mass privatisations, wrote in January. job in the Kremlin. his lot in with Putin, writing in a blog post Glazyev was unmasked as a contender Kudrin, however, showed some sym- that the Russian leader’s decisions were “al- for the central bank job in February - pathy with demonstrators protesting over ways in the interest of the country”. Soon just over a month before the deadline for what he called “major violations” in the after taking office, Putin appointed Glazyev Putin to make his choice - in an apparent conduct of the elections. In private, he to a Kremlin role advising on economic inte- bid by the liberal camp to undermine his turned down Putin’s job offer, sources fa- gration among post-Soviet states. candidacy. miliar with the matter say. Glazyev had made his name as an un- He declined to comment to Reuters. But Throughout the selection process orthodox economist, arguing the state pro-Kremlin commentators rallied to his Kudrin played his cards close to his chest should play a leading role in development support, with TV pundit Mikhail Leontyev and avoided public comment on the issue. and spurning the liberal consensus that saying Glazyev was the best man for the Although he did not completely break with has sought to bring Russia into the global central bank job, regardless of whether he

SPECIAL REPORT 4 Russia Inside Putin’s central bank surprise

was a candidate. Russia | The contest for the central bank job Currency was really a proxy battle, one senior former Rising oil prices helped Russia to run a fiscal surplus, pay down its debts and accumu- central banker told Reuters at the time, be- late $600 billion in foreign reserves in the 2000s. But when Lehman Brothers collapsed in September 2008 and oil prices crashed, the central bank had to give up its defence tween the fiscal and monetary orthodoxy of the rouble a er spending a third of its reserves on currency intervention. personified by Kudrin and the Glazyev state-led dash for growth. NUMBER OF DOLLARS 100 ROUBLES BUYS “It’s about policies, not about personali- $4.50 ties,” he said. THE ROUBLE NO INSIDER DROPPED The name of Alexei Ulyukayev, Ignatyev’s 4.00 most senior deputy at the central bank, IN35% 6 MONTHS appeared as the most credible insider on shortlists that did the rounds in January and February. But his opposition to rate 3.50 cuts counted against him. Putin also passed over candidates from Russia’s powerful state banks that, many economists argue, bear far greater respon- 3.00 sibility for the high cost of borrowing in Russia than the central bank itself. His eventual choice of Nabiullina caught many by surprise. “I myself learned she was nominated from the internet,” a senior gov- CENTRAL BANK RESERVES ernment source told Reuters. “I am not kid- $600 ding. Whoever tells you he knew which can- billion didate Putin would pick long ago is lying.” When her nomination became public, 400 DESPITE Kudrin tweeted to wish her success. Nabiullina will face a challenge in bringing 200 Russia’s unruly banks to heel. The role is com- BILLION$600 plicated by a plan to transform the central IN RESERVES bank into a ‘mega-regulator’, with added re- 2002 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 sponsibility for oversight of financial markets. Source: CBR, Reuters Even senior officials admit huge sums escape the oversight of banking regulators. In unusually forthright remarks Ignatyev, A QUESTION OF LOYALTY the outgoing central bank chief, said last candidacy. I understand how much this is a month that nearly $50 billion was illegally Nabiullina cut an uncertain figure when responsible, complex and professional task,” siphoned abroad last year. Putin proposed the central bank post to she told Putin in a meeting staged in front Much of that money, Ignatyev said, ap- her at a meeting on March 12 at his Novo- of journalists. peared to be controlled by “one well-organ- Ogaryovo residence outside Moscow. With television cameras rolling, ised group of people”. He did not name Kremlin reporters spotted her waiting, with Nabiullina then requested that, if parlia- them, but Putin’s critics have interpreted Ignatyev, more than an hour before the two ment approves her candidacy, the 65-year- the remarks to refer to the state officials were ushered into Putin’s office. old Ignatyev stay on as an adviser after he who, if not involved, at least tolerate fraud “I would like to thank you for the con- retires. Putin agreed. and money laundering by Russian banks. fidence you have shown in proposing my That may suggest Nabiullina, who

SPECIAL REPORT 5 Russia Inside Putin’s central bank surprise

advocated pro-growth policies as economy poses a threat to the fragile cohesion of the Alexei Anishchuk, Jason Bush, Lidia Kelly, minister but did not launch any landmark Russian elite. For now, Putin has succeeded Maya Dyakina and Katya Golubkova. Editing initiatives, will not stray far from the policy in keeping the key liberal players inside the by Timothy Heritage and Richard Woods course demanded by Putin. But it does not tent of Kremlin politics – and his nomina- mean the system liberals, many of whom tion of Nabiullina for the central bank job sympathise with protestors’ calls to fight of- is part of that strategy. But it will be a tough FOR MORE INFORMATION ficial corruption and boost democratic ac- act to sustain as he likely eyes a fourth pres- Douglas Busvine, Chief Financial countability, are on board for good. idential term in 2018. Correspondent, Russia It was Nabiullina’s husband, Yaroslav “When Putin switched jobs with [email protected] Kuzminov, rector of the Higher School of Medvedev, it divided society,” said a criti- Timothy Heritage, Bureau Chief, CIS Economics, who in April 2011 warned of cal Moscow-based economist. “By picking [email protected] a social confrontation in five to 10 years if Nabiullina he has divided the country’s in- Richard Woods, Senior Editor, Enterprise Russia’s leaders fail to address the concerns tellectual elite - even further than it is al- and Investigations, EMEA of the rising middle class. ready divided.” [email protected] It is that very proximity of potential dis- Michael Williams, Global Enterprise Editor sent to the centre of Kremlin power that Additional reporting by Darya Korsunskaya, [email protected]

POWER PLAYS: Though Putin is back as president in the Kremlin, he doesn’t always get his way, as his manoeuvres over nominating a new central bank chairman show REUTERS/ANTON GOLUBEV

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