The Central Bank raised the key interest rate from 13 percent to 15 percent, a move the former head of Russia’s central bank, Sergei Dubinin, describes as evidence of policy firmness. He notes that the tightening will have only an indirect effect on the ruble’s value, with the government’s foreign exchange rules playing a more direct role on currency movements. Dubinin spoke with socialbites.ca about the development.
He explained that the rate hike signals the leadership’s resolve to keep inflation in check. Its direct impact on the ruble is limited because the government already requires foreign exchange earnings to be delivered to the market, specifically to the Moscow Exchange, in scheduled ruble terms. The exact mechanics remain partly undisclosed, since many exporters sell dollars to intermediary agencies that then transact in rubles. He suggested that the mechanism may undergo changes in the near term.
Dubinin argued that higher borrowing costs and stronger deposit rates should, in theory, support economic growth while curbing inflation. Yet, he remained skeptical about the overall effectiveness of the central bank’s move.
He described a classic transmission: higher interest costs should raise the price of credit and push up deposit yields. Taken together, those dynamics are expected to cool new borrowing by businesses and households, potentially fostering growth while slowing inflation by keeping money out of circulation. Still, he cautioned that the policy’s impact hinges on broader fiscal dynamics, noting that much of the money in circulation is channeled through the budget. With the budget expanding and spending outpacing plans, Dubinin warned that the deficit could only be tempered by a weaker ruble, which would then drive larger foreign exchange inflows in rubles and higher wages.
According to Dubinin, the exchange rate will be shaped more by budgetary outlays than by the central bank’s actions because the current tools at the ministry’s disposal are insufficient to solve the underlying problems in the present environment.
He highlighted that last year’s oil and gas revenues accounted for about 46 percent of federal budget income. This year started with a dip in total oil exports, including gas, but the situation has improved somewhat. He expects the oil-and-gas share to remain a substantial portion of revenue. The mixed picture leaves value added tax as the most stable revenue source, with much of its flow tied to imports. If export revenue disappoints, the tax income may not fully compensate for the shortfall. This creates a difficult scenario where budget expenditures could become the main driver of growth, inflation, and even the exchange rate, rather than the central bank’s policy toolkit.
On Friday, the board of directors of Russia’s central bank decided to raise the key rate by 200 basis points, bringing it to 15 percent per year, citing heightened inflation pressures that exceeded earlier expectations.
Earlier in October, the dollar and euro stood at roughly 101 and 107 rubles respectively. By 14:30 Moscow time on Friday, the dollar hovered around 92 rubles and the euro near 97 rubles.
Socialbites.ca has previously explored how the key rate affects the lives of Russians and what the changes mean for ordinary people and businesses.