RUSSIA's Shock Decision

[00:00:00]Hi, welcome back to the channel. In today's episode, I want to talk to you about a really interesting development in Russia because the Russian Central Bank has just made another interest rate cut. Now, on the face of it, that might not sound particularly exciting. Central banks change interest rates all the time. However, this decision is actually quite a shock because when you dig into the details, it raises some important questions about the state of the Russian economy and where things may be heading over the next 12 months. And if you've been following me, you'll know that a lot of central banks are actually looking to pause interest rate cuts and are actually starting to increase interest rates as a result of the conflict in Iran, which has pushed up oil prices and pushed up inflation all across the world. Now, before I get into the details on all of this, could I ask anybody that hasn't subscribed yet to please hit that subscribe button. It really does help me with the algorithm and also puts a smile on my face. So, let's get into the details. The Bank of Russia has just announced that it's reduced the benchmark interest rate by a further quarter of a percent, taking it down to 14.25%.

[00:01:08]Now, that's a big number, isn't it? That is still incredibly high compared with interest rates in the rest of the developed world. And this is actually the ninth consecutive interest rate cut that Russia has announced. This time last year, Russia's interest rate was sitting at 21%, but since that time, the Central Bank has steadily reduced rates and are now down to the 14.25%.

[00:01:33]And this is where things become interesting because normally central banks cut interest rates because inflation has been brought back under control. The problem is that inflation in Russia isn't under control. The latest inflation data shows that inflation is currently sitting at 5.3%.

[00:01:51]Now, that's the third highest out of all the countries in the G20. And that's an improvement compared to where it was previously. It's been moving in the right direction, but the target rate of inflation in Russia is 4%. Now, you might be asking, why is it 4% compared to 2% in places like the USA and the UK?

[00:02:10]Well, it's because it's not realistic to be 2%. It's impossible for Russia to get anywhere near 2% at the moment. So, inflation is running more than 30% above the level that the Central Bank says represents price stability. And that's before we even start talking about some of the risks that are emerging. Across much of the world, central banks remain concerned about inflation. The war in Iran has driven up oil prices, natural gas markets have become much more volatile, shipping costs have increased, energy prices have risen, and all of those prices eventually find their way into consumers' pockets. Many economists are now discussing whether inflation will rise again in some countries as a result of these higher costs. So, at a time when many central banks are becoming more cautious, Russia is continuing to cut rates. And that raises a very obvious question. Why is it doing it? And the answer appears to be that growth has now become the bigger concern in Russia, because whilst inflation remains above target, there are increasing signs that the Russian economy is struggling under the weight of exceptionally high interest rates.

[00:03:16]Even after nine consecutive rate cuts, Russia still has one of the highest interest rates in the world. In the G20, Russia is right at the top alongside Argentina and Turkey. Globally, there are only a small number of countries with higher borrowing costs. Yet, Russia's inflation rate is nowhere near the highest in the world. When you compare inflation and interest rate side by side, there is a significant disconnect. Russia's interest rates remain extraordinarily high relative to its inflation rate, and that tells us something very important. It suggests policymakers believe the economy has become increasingly fragile or it may suggest that the inflation figure is undercooked. Interest rates of 21% a year ago were extremely restrictive, but even at 14.25% which is where they are today, that's still extremely high. That's higher than it's been in most of the developed world ever. You know, that these are record-breaking levels and at those levels businesses think twice or probably more than twice about borrowing. Consumers will delay major purchases. Property markets slow down cuz people don't want to take on mortgages at those sort of rates.

[00:04:32]Investment projects become much more difficult to justify to get a return on your investment and so economic activity cools and that's exactly what's been happening in Russia. Over the past few months, there've been increasing discussions about slowing growth, weaker demand, and growing pressure on parts of the economy. The Central Bank itself acknowledged that economic activity is cooling and that appears to be the key reason why rates are continuing to come down rather than focusing on inflation.

[00:05:02]In simple terms, inflation is still a problem, but growth is a bigger problem for Russia.

[00:05:09]However, there's also another complication at the moment. At exactly the same time as the Central Bank is cutting rates, concerns are beginning to emerge regarding fuel supplies and fuel prices. Russian regulators recently demanded explanations after reports that one fuel retailer increased prices dramatically. Actually increased them by 19% overnight. Now, fuel is one of the most important costs that feed into inflation because transport becomes more expensive, distribution then becomes more costly, manufacturing prices go up, agriculture has to bear those costs, and eventually consumers end up paying more.

[00:05:51]Fuel inflation has a habit of spreading throughout the entire economy very quickly. So, whilst headline inflation may currently be moving in the right direction, there are signs that new inflationary pressures are starting to emerge. That's before we consider the broader impact of developments in global energy markets. One of the most important indicators monitored by central banks is inflation expectations.

[00:06:13]Not what inflation is right now, but what people think inflation will be tomorrow, because expectations often become reality. If workers expect prices to rise, they demand higher wages. If businesses are expecting cost increases, then they will increase their prices, and that creates a cycle which can become very difficult to break.

[00:06:33]Inflation expectations in Russia remain elevated. They are around about 13% right now, which means the fight against inflation is not yet over. And that's what makes these rate cuts so fascinating. The Central Bank is effectively trying to balance two competing risks. The risk that inflation remains too high, and the risk that the economy slows down too much. For much of the last two years, inflation was the priority. However, today that balance is changing. That brings us to another important aspect of this story, the person who makes these decisions.

[00:07:07]Because whilst everyone has been focused on interest rate announcements, there's also been growing discussions regarding Elvira Nabiullina, the governor of the Russian Central Bank. Nabiullina has become one of the most important economic figures in Russia. Whether you agree with her policies or not, she's widely regarded as one of the most competent policy makers in the country.

[00:07:28]Over the last decade, she's overseen Russian financial system through sanctions, banking crises, currency volatility, inflation shocks, and the enormous economic disruption that followed the invasion of Ukraine. Many analysts believe she's played a critical role in maintaining stability within the Russian economy. And that's why recent events attracted so much attention. Over the last few weeks, Nabiullina was absent from several high-profile public events. She missed important economic meetings and appearances that she would normally have attended. That immediately sparked speculation. The official explanation was that she'd been suffering from a severe respiratory illness and had temporarily lost her voice. She's now returned to public duties and personally announced the latest interest rate decision. However, the speculation itself tells us something important. People asking questions because Nabiullina has become synonymous with economic stability. When a senior official disappears for a few days or weeks, markets don't normally care. When the head of the Central Bank disappears, people start paying attention. And perhaps the most significant issue is that her current term expires in June next year. That means Russia is now approaching a major transition period because investors know what Nabiullina stands for. They know she prioritizes financial stability, that she's prepared to keep rates high if she believes inflation is a threat, and they know how she reacts during periods of crisis.

[00:08:55]Nobody really knows what's coming next, and that's where this story I think is getting interesting because discussions are already beginning about potential successors and what direction the Central Bank could take after Nabiullina eventually leaves office. Will her replacement maintain the same focus on inflation? Will they cut rates more aggressively? Will they prioritize growth over stability? Will political pressure increase? Now, we don't know the answer to those questions yet, and so uncertainty is starting to grow because Russia is now entering a period where the economy faces multiple challenges simultaneously. Growth appears to be slowing, interest rates remain exceptionally high, inflation remains above target, fuel prices are creating problems, government spending is elevated, labor shortages continue to affect many sectors, and the financial burden of the war continues to weigh on the economy. Against that backdrop, the question of who controls monetary policy is becoming increasingly more important.

[00:09:54]So, when we step back and look at the bigger picture here, I think there are really two stories. The first is the rate cut itself, the fact that Russia has now cut interest rates on nine consecutive occasions despite inflation remaining above target, suggests that concerns about growth are becoming more significant than concerns about inflation. The second story, I think, is even bigger. Russia is now approaching the end of the Nabiullina era. For more than a decade, she's had a hand on the tiller, she's been one of the key figures maintaining confidence in the Russian financial system. And while she remains in place at the moment, the discussion about what comes next is now beginning, because replacing a central banker is one thing, replacing someone who's become the face of economic credibility is very different. Perhaps the biggest question facing Russia isn't whether interest rates should be at 14.25% It's who will be setting those interest rates in 12 months' time. And the answer to that question could have significant impact on the direction of the Russian economy for years to come. So, I'll keep you posted on any further news and developments. Hopefully, you found today's video useful, informative, and most importantly, thought-provoking. If you've liked what I've said, then please give me a thumbs up. Please subscribe to the channel if you haven't done so already. Thank you to everyone that's supporting me, who've bought me a coffee, or sent me YouTube super thanks, or signed up as a patron or member.

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[00:12:47]>> Just the power of magic in the town.

[00:12:50]On his way, he met a stranger.

[00:12:52]The stranger said, "I'll show you."

[00:12:57]The magic so magic in the air.

[00:13:00]The magic the magic in the air.

[00:13:04]Then she went to run her solid jacket down.

[00:13:07]She was very upset.

[00:13:09]And she um the magic in "I'll show you."

[00:13:14]And she threw the cans out the window.