Opinion | Why is Russia defending the ruble?

It has been 37 days since Vladimir Putin’s forces reportedly thought they could capture kyiv in 48 to 72 hours. Many news reports describe the Russian invasion as “stalled,” but as I read the detailed analysisThat’s not quite right: Ukrainian forces are fighting back, and in many places Russia appears to be losing ground.

However, one thing that Russia has managed to defend quite effectively is the value of its currency. The ruble tumbled in the days after the Ukraine invasion, but has since recouped almost all of its losses:

How did that happen and what does it mean?

One thing worth noting is that Russia’s economic officials appear to be more competent than their generals. Elvira Nabiullina, the governor of Russia’s central bank, a role equivalent to that of Jerome Powell at the Federal Reserve, is especially well regarded by her peers abroad. Nabiullina reportedly tried to quit after the invasion began, but Putin did not let her go.

As unwilling as she was to remain in her job, Nabiullina and her colleagues did their best to defend the ruble. They raised the key interest rate, roughly equivalent to the federal funds rate in the United States, from 9.5 percent to 20 percent, to induce people to keep their funds in Russia. They also imposed extensive controls to prevent capital flight: Russians have faced restrictions on moving their money into their foreign bank accounts, and foreign investors have been banned from exiting Russian stocks, and more.

But there is a mystery here. No, it is not surprising to see the ruble recovering with such drastic measures. The question is why Russia is willing to defend its currency at the expense of all other goals. After all, the draconian measures taken to stabilize the ruble are likely to deepen what already looks like a slump in Russia’s real economy, triggered by a surprisingly large and effective sanctions imposed by the free world (I think we can revive that term, right?), in response to its military aggression.

Let us make here a brief excursion into economic theory. One of the classic propositions in international economics is known as the “impossible trinity.” The idea is that there are three things a country could want from its currency. You might want stability in the value of the currency in terms of other currencies, for example a stable value of the ruble in dollars or euros, to create greater certainty for businesses. You may want the free movement of funds across your borders, again to make doing business easier. And it might want to retain monetary leeway: the ability to lower interest rates to fight recessions or raise them to fight inflation.

The impossible trinity says that you cannot have everything, that you have to choose two out of three. It can, like Britain, have open capital markets and an independent monetary policy, but that means allowing the value of the pound to fluctuate. It can, like the countries that have adopted the euro, have free movement of capital and monetary stability, but only by giving up monetary independence. Or it can, like China, have a stable currency and its own monetary policy, but only by maintaining capital controls. (By the way, those controls are one of the main reasons the renminbi isn’t going to rival the dollar as a world currency for the foreseeable future.)

So what’s so baffling about Russia? Normally, a country can choose two of the three legs of the trinity; Russia has decided to take only one. He has imposed harsh capital controls, but has also sacrificed monetary independence, slashing interest rates in the face of an impending recession.

In effect, Russia is taking a belt and suspenders (not to be confused with belt and road) to defend the ruble, and this has apparently taken precedence over all other economic goals. Why?

Let me offer a speculation, on the clear proviso that it is only speculation, not based on any direct evidence. My guess is that the value of the ruble has become a crucial target not so much because it is so important but because it is clearly visible.

Let’s assume that, as seems highly likely, Russia sees a big rise in inflation and a drop in gross domestic product in the coming months. Will the Putin government admit that these bad things are happening? Quite possibly not. Authoritarian regimes often try to suppress bad economic data. Recently, for example, Turkey’s President Recep Tayyip Erdogan responded to reports of high inflation by saying dismissal the head of your nation’s statistical agency.

A few years ago, researchers at MIT created the Billion Price Project using online price data to specifically track the Argentine government’s consistent underestimation of inflation at the time. The same approach also turned out to be very useful in the United States for the opposite reason: as a way to refute claims by right-wing “inflation truthers” that the Obama administration was rigging the books (it wasn’t).

If Russia’s economy deteriorates as much as most expect in the near future, it seems very likely that the nation’s gagged media will simply deny that anything is wrong. However, one thing they could not deny would be a drastically depreciated ruble. So defending the ruble, regardless of the real economy, makes sense as a propaganda strategy.

Another thought: Among the people who might not be aware of the deteriorating Russian economic conditions, as long as the ruble holds its value, might be Vladimir Putin himself. US intelligence claims that Putin military advisers been afraid to tell him how bad the war is going. Is there any reason to believe that his economic advisers will be more courageous?

So Russia’s defense of the ruble, while impressive, is not a sign that the Putin regime is handling economic policy well. Instead, it reflects an odd choice of priorities, and may actually be one more sign of Russia’s political dysfunction.

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