For years, Russia’s central bank has skillfully shielded the country’s economy when crisis has loomed, drastically raising interest rates, restricting money movements or taking over ailing banks. The swift, sharp moves conveyed a clear message that, despite increasingly bitter economic conflicts with the West, economic stability would be maintained at any cost.
On Tuesday, the bank’s long-serving and widely respected chief, Elvira Nabiullina, moved assertively again, announcing the third-largest interest rate increase in a decade to shore up the national currency, the ruble, and dent rising inflation. Yet, this time, her aggressive moves had little immediate effect on the markets.
The central bank’s actions underlined the perilous moment facing Russian economic officials as they try to contain the seismic forces unleashed by President Vladimir V. Putin’s invasion of Ukraine. The war has left policymakers with a seemingly impossible set of tasks: maintaining economic stability while financing the war machine and coping with Western sanctions; taming inflation without pitching the economy into recession.
The bank raised the benchmark interest rate by 3.5 percentage points to 12 percent. High interest rates raise the cost of borrowing, inhibiting spending. That, in turn, slows economic growth and can curb inflation. But political considerations can push in the opposite direction, for low interest rates that stimulate spending and keep the economy moving.
The ruble recovered modestly after the announcement; after falling to 100 to the dollar on Monday, it reached 97 on Tuesday.
Businesspeople criticized the rising cost of borrowing, and economists said the factors weakening the ruble were so powerful that the interest rate increase would fail to achieve Ms. Nabiullina’s goals. Her political detractors, meanwhile, have stepped up their attacks, accusing the central bank chief this week of either going too far or not far enough to defend the Russian currency.
“As long as the government’s priority remains spending on the war effort, it’s going to be very difficult for the central bank to prevent the economy from overheating,” said Liam Peach, a senior emerging markets economist at Capital Economics in London. He added that changing interest rates would not have the desired effects unless the government cut spending, which it is unlikely to do before next year’s scheduled presidential election.
Economic officials around the world, including those in the United States, are forced to make trade-offs between conflicting priorities, and they are increasingly subjected to political pressures.
But the balancing act for Ms. Nabiullina and other Russian economic leaders is made especially hard by Mr. Putin’s determination to wage the largest land war in Europe since World War II while preserving the facade of a nation at peace. Despite thousands of Russian deaths, a government that refuses to call the conflict a war has worked hard to allow most citizens to carry on with their lives as usual and to prevent any public questioning of the rationale for war.
The war prompted waves of Western sanctions and an exodus of capital and workers — both foreign and Russian.
Days after the invasion in February 2022, the central bank raised interest rates by more than 10 percentage points and temporarily restricted currency trading, drastic moves aimed at shielding the economy from the initial shock. The policies broadly worked, preventing the Russian economy from collapsing. After an initial plunge, the ruble stabilized.
Yet, as the invasion descended into a war of attrition, the central bank began to steadily cut rates again, mirroring the Kremlin’s desire to maintain popular support for the war. Public spending boomed, allowing factories to raise wages and hire more workers to meet military orders, and the government gave Russians access to cheap mortgages and other subsidies.
In the first five months of this year, the government spent 50 percent more, in rubles, than in the same period in 2021, even as state revenues fell sharply because of oil sanctions.
That spending binge put more money in ordinary Russians’ pockets, even as domestic production was unable to meet the new demand for goods and services. That adds up to inflation, which rose to an average of 7.6 percent per year in the past three months, when adjusted for seasonal discrepancies, according to the central bank, significantly above its 4 percent annual target.
Inflation and the weakening ruble also fed on each other. Unable to meet their needs locally, companies and individuals have turned to imports, often paying higher prices to bypass sanctions. That has boosted demand for foreign currency and weakened the ruble, which raises the cost of imports still higher.
Ordinarily, a weak currency boosts exports, making a country’s products cheaper abroad, but sanctions have sharply limited Russian producers’ ability to sell to foreign markets.
While Russia’s inflation remains below what the United States and much of Europe have experienced as recently as early this year, the rapid pace of price increases created a perception that the central bank was losing control at a perilous time for the economy.
Russia’s currency is also pressured by the ongoing capital flight. Facing an uncertain future, many Russians have moved their savings abroad since the outbreak of the war, transferring more than a billion dollars’ worth in three days of national upheaval in late June, according to the central bank, when Wagner mercenaries mutinied against the military.
The ruble has been on a long, steady slide since early January, when it traded briefly at fewer than 70 to the dollar. On Monday, when it crossed the symbolically threshold of 100 to a dollar, several Russian politicians blamed Ms. Nabiullina for the decline.
The Kremlin’s chief economic adviser said the currency was losing its value because the central bank was providing excessively cheap credit, without mentioning the government’s own role in stoking a wartime credit boom. A “strong ruble is in the interest of the Russian economy,” the adviser, Maksim Oreshkin, wrote in a column published by the state-run TASS news agency.
Several Russian lawmakers called on Ms. Nabiullina to publicly explain the reasons for the ruble’s decline. “The exchange rate has a significant impact on the social rights of our citizens,” one nationalist lawmaker, Andrei Klishas, wrote on the Telegram messaging app on Monday.
The central bank reacted on Monday with a short statement that it was calling an extraordinary meeting the next day, and then sharply raised rates on Tuesday.
Some Russian economists criticized Ms. Nabiullina for a heavy-handed response to a problem she was unable to solve.
“We are disappointed that the press statement did not explain the necessity of holding the extraordinary meeting,” economists at Russia’s largest private lender, Alfa Bank, wrote in a note to clients on Tuesday. This “reduces the predictability of the central bank’s actions,” they added.
Economists say they believe that Ms. Nabiullina still has technical tools to affect the course of the Russian economy. Last week, for example, the central bank halted its usual purchase of Chinese yuan for its reserves in order to shore up the ruble.
The central bank can go further, selling off more of its foreign currency holdings, restricting movement of money out of the country and forcing exporters to convert their international currency earnings into rubles, Mikhail Vasiliev, an analyst with the Moscow-based lender Sovkombank, told local news media on Monday.
But the war appears to have dented Ms. Nabiullina’s main weapon, setting the cost of borrowing, underlining the waning power of Mr. Putin’s economic officials to shield the economy from his actions.
Oleg Matsnev and Alina Lobzina contributed reporting.