Dehn: Russian central bank deserves A+

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Jan Dehn, head of Research at Ashmore discusses how Russia’s central bank has handled a triple-whammy of shocks without putting a foot wrong.

The Russian central bank deserves an ‘A+’ for its handling of the Russian economy over the past year. It has literally not put a foot wrong in what can only be described as an extremely trying set of circumstances. Recall that the central bank had to steer the economy through a ‘triple-whammy’ of mega shocks, including a geopolitical crisis in Ukraine, a collapse in oil prices and the imposition of financial sector sanctions that barred a large number of Russian companies from refinancing in European and US markets.

In assessing the central bank’s performance, marks should first be awarded simply for being well prepared. Russia clearly learnt the lessons of 2008/2009 after which it had adopted a fully flexible exchange rate and converted the OFZ market to Euroclearable settlement. Russia also entered the crisis with a very strong FX reserve position.

The next set of marks should be awarded for maintaining focus and discipline. In the face of strong political pressure the central bank allowed the currency to adjust in line with oil prices. This insulated the public finances from the oil price shock.

The central bank also earns a bonus point for not introducing capital controls and racks up significant additional credit by decisively hiking interest rates to 17% on the (correct) view that an external shock, such as falling oil prices, requires a decisive adjustment of domestic demand. The central bank then went on to cut rates well ahead of market expectations – a decision that subsequent events proved to be immaculate timing.

This decision showed leadership and a willingness to take risks. The central bank showed the same qualities when it then decisively helped to bring Russia’s extremely mispriced sovereign spreads down to more rational levels by launching an FX repo facility that allowed locals to buy sovereign bonds. It also understood the temporary nature of such interventions and tightened the facility as spreads and the currency approached more rational levels.

Based on professional competence, Russian central bank governor, Elvira Nabiullina, is a contender for central banker of the year.

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