Nabiullina admits sanctions taking toll on Russian economy

After an initial shock to financial markets, sanctions on Russia are now starting to bite for the real economy, Elvira Nabiullina told the Russian parliament on April 18.

“Our economy is entering a difficult period of structural changes associated with sanctions,” the Bank of Russia governor said in remarks.

Many countries worldwide are grappling with supply shortages, but the problem is far more acute for Russia, which is facing embargoes on many key imports as well as disruption to logistics. Nabiullina said businesses were having to rethink their supply lines, as production is often “critically dependent” on parts shipped from overseas.

She warned the Russian economy is likely still not experiencing the full effects of these structural changes, “because there are still reserves in the economy”. But she noted that sanctions “are being tightened every day”. “The period when the economy can live on reserves is finite,” she added.

As well as constricting Russia’s output, supply problems are fuelling inflation. Nabiullina said the central bank planned to remain patient and tolerate some inflation while the economy adjusts. Even so, she said inflation must not become “uncontrollable”, so the Bank of Russia plans to return it to around 4% in 2024. Headline inflation surged from 9.2% in February to 16.7% in March.

After Russia began its full-scale invasion of Ukraine on February 24, Nato members were quick to impose sanctions, targeting Russian officials, financial institutions and the central bank.

One of the toughest measures froze the Bank of Russia’s overseas assets, locking away as much as $300 billion, around half the central bank’s reserves. The move prevented the central bank from intervening to defend the currency, forcing it to impose capital controls instead.

According to news agency Interfax, Nabiullina told the parliament that the Bank of Russia is preparing legal action in the hope of freeing some of the reserves.

“Of course, this is an unprecedented ‘freeze’ of the gold and forex reserves, so we will be preparing all lawsuits, and we are preparing to file them, as this is unprecedented on a global scale, for the gold and forex reserves of such a large country to have been frozen,” she told the parliament.

The governor acknowledged that it was difficult to use even those reserves still under the central bank’s control, because Russia is shut out of settlement systems in most reserve currencies.

Nabiullina said the Bank of Russia is working to create settlement channels in national currencies on a bilateral basis “with a number of countries”. The project could take some time – each country has its own regulatory features and infrastructures, she noted.

Nabiullina cited central bank digital currency (CBDC) as another possible means of circumventing sanctions. The Bank of Russia is currently testing its CBDC with five banks, and parliament is considering legislation to permit CBDC issuance.

She said the central bank’s work to make the domestic payment system autonomous had been critical to keeping the economy running. Because the Bank of Russia operates its own payments infrastructure, payments continuity was “practically seamless” when Visa and Mastercard pulled out of the country, even though the payments giants had previously issued 90% of the cards in Russia.