Russian Economic Policy: The Antithesis of Turkey’s Inimical Approach

In my last article, I discussed the illogical approach of the Turk premier to counter inflation. The dogmatic policies of President Erdogan are driving the Turkish economy into the ground. It is fascinating to witness the antipode to Turkey’s immature dovish stance embodied by Russia. Last week, the Bank of Russia – the Russian central bank – announced its second 100 basis points hike this year, pulling the interest rates cumulatively by 425 basis points in 2021. Russia, known for its historically low-interest rates, has been raising the policy rate gradually since the dawn of the pandemic in 2020. The hike last week marked the seventh straight increase by the Bank of Russia: elevating the key rate to 8.5%. The rate hike is in direct contrast to the plunging interest rates in Turkey – dropping 500 basis points to 14%. However, while the rampant inflation and subsequent shortages have expectantly imperiled the general Turk population, Russian inflation doesn’t really present a drastically different story despite completely different countermeasures in action.

The rate hikes in Russia – one of the most aggressive tightening schedules around the globe – started around the same time when inflationary pressures started showing rigor. Months after consistently grounded prices, inflation began to soar beyond controlled thresholds in March 2020. Consumer prices began to skyrocket while savings deteriorated in value. With a sharp decline in the Ruble, inflation further breached the 4% benchmark to climb into double figures. The Russian Central Bank chief, Elvira Nabiullina, raised concerns alongside Russian premier Vladimir V Putin, calling inflation a ‘real disaster’ and a concern for officials and citizens. Ms. Nabiullina did urge the government to remove the price caps from necessities to allow equilibrium to settle. However, she never complained of presidential intervention in Russian monetary policy – again a sharp contrast to Mr. Erdogan’s infamy for dismissing multiple central bank chiefs. Nonetheless, such began the hawkish shift in Russian policymaking when hardly any country deemed inflation (over recession) as a sign of concern.

Today, President Putin lauds the hawkish policies of his country for taking a preemptive (and systematic) action against inflation. While Russia’s inflation rate still stands at 8.1% – more than twice the 4% threshold – it is evidently controllable. Recently, President Putin cited that even the US is running a 6.8% inflation rate against an ambitious target of 2%: insinuating a relatively robust policy response over his arch-foe. He stated: “I know the real sector is unhappy with the rate hikes. But if not done, we would (have) ended up like Turkey.” His parallel is patently accurate since the Turkish Lira has lost more than half of its value against the US dollar this year. Further exacerbating the nosediving currency, frequent rate cuts have pushed the inflation rate past 20%. While President Erdogan is more concerned with salvaging his waning popularity, President Putin is appreciably focused on a strict monetary policy to pull the inflation rate down to 4%-4.5% by the end of 2022.

Many economists believe that this could be the last rate hike of this cycle. Yet, with rising geopolitical tensions over Ukraine, the arching guidance of the Bank of Russia remains hawkish. The Russian Ruble – unlike the Turkish Lira – has benefited from the tight monetary policies (and oil gains) this year – becoming one of the best performers in the emerging markets. However, the central bank doesn’t seem to take any leverage for granted. In her post-rates press conference, Ms. Nabiullina urged: “The chance of several rate hikes is lower (still) we leave open the possibility of a key rate hike – possibly not just one.” Thus, my wager is on Russian stability. In my opinion, while the threat of sweeping US-European sanctions is catalyzing the hawkish perception in the Kremlin, Russia is far better suited to handle an economic shock than its European counterparts. An active invasion into Ukraine might be an exaggeration on Russia’s part. But slapping crippling sanctions on Russian oil – the primary source of fuel in Europe – is nothing short of an empty threat. Thus, if Russia somehow manages to maneuver through the Omicron threat, it is on track to maintain its 4.5% growth rate – and even harness inflationary pressures in the long run.

Syed Zain Abbas Rizvi
Syed Zain Abbas Rizvi
The author is a political and economic analyst. He focuses on geopolitical policymaking and international affairs. Syed has written extensively on fintech economy, foreign policy, and economic decision making of the Indo-Pacific and Asian region.