Elvira Nabiullina is Governor of the Central Bank of the Russian Federation, having formerly served as the country’s Minister of Economic Development.

At the end of February 2022, the Russian economy faced an unprecedented wave of sanctions, primarily aimed at the country’s financial sector. Within a matter of months, almost every major Russian bank had been hit by sanctions from multiple jurisdictions. The immediate fallout was significant: foreign assets belonging to some of these banks were frozen, and they lost access to international payment systems in major reserve currencies. Additionally, a portion of the Central Bank of Russia’s reserves held in Western financial institutions was frozen, limiting its ability to conduct foreign exchange (FX) operations in case of financial instability. Previously, such operations were predominantly carried out in U.S. dollars and euros.

 

The initial impact of the sanctions on Russia’s economy was quite severe. The exchange rate took a massive hit; in early 2022, the rouble traded at around 75 to the dollar, but by mid-March, it had plummeted to 120—a depreciation of over one-third. Several factors contributed to this dramatic fall. First, the sanctions effectively halted capital inflows from Western jurisdictions, and economic uncertainty drastically accelerated capital flight. In addition, the foreign exchange supply shrank due to delays in payments to Russian exporters. Meanwhile, domestic demand for foreign exchange soared. Market participants, bracing for further depreciation, scrambled to acquire foreign currency. Importers, facing a collapse in trade credit, required more dollars and euros, while banks urgently sought to match their foreign currency liabilities and assets.

 

As often happens in such situations, there was a panic-driven surge in demand for cash, both in foreign currency and roubles. Public fears triggered the withdrawal of 1.3 trillion roubles (around $14 billion) from the banking sector within days—a record in Russian financial history. In response to the turmoil, asset prices on the Moscow Exchange plummeted, prompting the Central Bank and the Moscow Exchange to suspend trading in bonds and equities for over a month.

 

By early summer 2022, the economic landscape had shifted dramatically. The foreign exchange rate, which had skyrocketed during the initial phase of the crisis, retraced to pre-crisis levels by late April, and by the end of June, the rouble appreciated to levels not seen since 2015. Asset prices, which had been in freefall, stabilized over the summer and made significant gains by mid-2023. Banks adjusted to the new environment, accelerated credit activity, and showed signs of returning to profitability. Inflation, which had spiked in the spring alongside currency depreciation, slowed to a near halt. The economy, after just a few months of contraction, began to rebound in the third quarter. The growth turnaround was quite impressive. Growth rates in 2023–2024 exceeded those seen in the three years preceding the pandemic, averaging approximately 3.7 percent compared to 1.8 percent between 2016 and 2019. The Bank of Russia resumed foreign exchange operations under the revised budget rule, now on the renminbi market of the Moscow Exchange.

 

I am often asked about the specific anti-crisis policy mix that Russia, and particularly its Central Bank, employed to weather the storm of severe sanctions. In this essay, I would like to look deeper and discuss the fundamental causes of the resilience of the Russian financial markets and economy. In the next section, I discuss the importance of ex-ante preparedness and ex-post comprehensive actions. In the second section, I elaborate on the role of such fundamental factors as a market economy and central bank independence. I also discuss the trade-off between the stability and flexibility of the framework we use. In the third section, I examine the future challenges for the Russian economy and policymakers. Finally, I raise the issue of why I believe the Central Bank should stick to its mandate and conventional policies even in the unconventional circumstances in which we find ourselves today.

Russia’s rescuer in a time of crisis: Governor Nabiullina addresses journalists in March 2022 / Source: cbr.ru

 

Anti-Crisis Policies 

There are two factors that are extremely important in times of crisis. The first is the resilience of the financial system and economy to shocks. It should be built proactively, not reactively—ex-ante rather than ex-post. A nation’s economic fortitude depends on its ability to prepare for shocks long before they strike, creating a set of buffers in the financial sector and the overall economy that can absorb and mitigate external pressures. The second factor is the regulator’s speed and scope of response. In the face of a crisis, the swiftness and comprehensiveness of action are crucial. The Russian Central Bank’s rapid and multifaceted approach proved essential in navigating the turmoil. Let me dive into these two points further.

 

The financial sector’s resilience rests on three key pillars. The first is the accumulation of buffers to ensure a robust safety margin against potential shocks. A resilient financial system should be well-capitalized, maintain adequate liquidity, and balance its foreign exchange assets and liabilities. Central banks, in turn, need substantial reserves to stabilize markets in varying scenarios. In our case, a diversified reserve strategy—across both currencies and geographic locations—was crucial. This proactive diversification was designed to guard against both economic and geopolitical risks.

 

The second pillar of resilience is the absence of significant dislocations and vulnerabilities within the system. This goes beyond simply building buffers. For instance, even if the banking sector as a whole holds substantial buffers, individual weak banks can still expose the system to risk. Similarly, a well-capitalized banking sector cannot address challenges arising from a high share of small, non-professional participants in the stock market, especially if their investments are channeled into foreign companies traded on international exchanges.

 

The third pillar is public confidence in the central bank’s policy framework and its ability to maintain financial and price stability. Here, the Bank of Russia benefited in 2022 from its experience during past crises and its successful disinflationary efforts between 2015 and 2019. When we raised interest rates at the end of February 2022, we were able to not only curb financial stability risks but also anchor inflation expectations faster than in the past. The market remembered the 2014 hike, subsequent disinflation policy, and its outcome. Because of this experience, the market understood that high rates could bring inflation down.

 

As I said, resilience is one factor of success, and speed and comprehensiveness of response is the other. Reflecting on the lessons from our anti-crisis policy experience, it is evident that there are usually numerous measures and combinations to consider. Central banks typically have a range of instruments at their disposal, allowing them flexibility in their approach. The crucial factor is not just the choice of tools but the speed at which they are deployed. Acting swiftly and implementing a comprehensive package is essential to preserving market confidence. Speed takes precedence over precision; immediate action lays the groundwork for stability, allowing room for additional measures to be introduced and existing tools to be adjusted as the situation evolves.

 

In this essay, I skip the detailed description of our anti-crisis measures. The Bank of Russia has outlined its anti-crisis policies, efforts to strengthen the financial sector by removing weak players, and strategies for building buffers in various publications, including the previous years’ Financial Stability Reviews, which we publish twice a year. In addition, we released a comprehensive “Report on Anti-Crisis Measures,” detailing our approach and the lessons learned. The publication demonstrates both the development of our anti-crisis tools and the efforts we made after every previous crisis to make the system more resilient. These measures were chosen given the institutional structure and specifics of the Russian financial markets, as well as the peculiarities of our regulatory framework.

 

Foundations of Economic and Financial Resilience

When discussing the resilience of the Russian economy to sanctions, I cannot overemphasize the importance of one main factor, i.e. that the Russian economy is a market economy. The Russian economy weathered the recent turbulence because it embodies the characteristics of a market economy, with entrepreneurs responding to market signals and pursuing their own commercial interests. The reconfiguration of logistics to navigate trade barriers and new directions of trade, the search for more efficient international payment channels, and innovations in domestic production, including substitutions of previously imported parts—are primarily the outcomes of private initiative, not government intervention. Government and Central Bank policies, of course, helped. However, they wouldn’t have been as effective if market forces were not at work as well.

 

The tools and procedures that central banks deploy to stabilize inflation, curb financial imbalances, and counteract shocks are fundamentally suited to a market economy, characterized by competition and decentralized decisionmaking. They would not work properly in a planned or overregulated economy.

 

Public institutions have a duty to provide the necessary legal, institutional, physical, and digital infrastructure for the market economy. They must defend property and contract rights while safeguarding competition to foster a dynamic economy. In this context, central banks play a pivotal role: they ensure the stability of the purchasing power of the national currency, provide payment infrastructure, regulate and supervise financial markets, and conduct monetary and foreign exchange operations. However, it is imperative to ensure that administrative measures do not undermine the very market principles that drive economic resilience. This has been especially important in recent times, influencing some of the key decisions we made.

 

The second fundamental basis of successful policy implementation, which I would like to discuss, is central bank independence. Central bank independence is a precondition for its success. It is a cornerstone of building market confidence. At the same time, effective monetary policy and measures to preserve financial stability can reinforce independence. Independent central banks can act more decisively, but at the same time, the success of previous policies strengthens trust in central bank policies, thus providing them with more de facto independence.

 

It is widely recognized that in order to effectively fulfill its mandate, a central bank must operate free from political interference. Independence in policy decisions, paired with a clear and well-defined mandate for monetary and financial stability, forms the bedrock of modern central banking. This autonomy allows central banks to make decisions that prioritize the medium- and long-term well-being of the people and the economy, rather than being swayed by short-term political objectives. Sacrificing this independence risks not only undermining the central bank’s goals but also eroding public trust in the entire monetary system. Such a loss of confidence can have a prolonged and damaging impact on both price and financial stability.

 

By acting independently and adhering to our mandate, the Bank of Russia has been able to implement tough policies when necessary several times in recent years. On several occasions in the past 11 years, we have raised interest rates to double-digit levels to stabilize inflation and preserve financial stability. These actions, while often criticized by domestic policymakers and businesses, have been crucial in controlling inflation and upholding both our monetary policy and financial stability mandates. The episodes of 2014 and 2022 demonstrated that sharp interest rate hikes are effective in halting depositor panic and bringing money back into the banking system.

 

Our approach to financial sector regulation has been similarly conservative. We adhere to the Basel III framework, and over the past decade, we have worked to clean up the financial sector, removing weak banks and pushing the remaining players to comply with regulations, enhance transparency, and accumulate necessary buffers. These efforts paid off during the crises of 2020 and 2022, when the financial system proved resilient to severe shocks. Had we been less conservative, or heeded calls for less stringent regulation, the outcomes could have been far more detrimental, as past crises have shown.

 

The Central Bank of Russia enjoys a significant degree of de jure independence. According to the Constitution, we can conduct our policies free from government influence, a principle that certainly makes our task easier. However, history—both domestic and international—offers numerous examples in which ostensibly independent central banks have faced intense pressure from political leaders or other government entities, leading to compromises in policy. This is why I firmly believe that central banks must continuously defend their independence and prove that they are worthy of it. The best way to do so is by adhering to their mandates and consistently demonstrating that they can achieve their objectives.

 

It is often said among central banks and macroeconomists that those with a strong track record of ensuring price and financial stability enjoy greater confidence from market participants and the public. While this is true, it only captures part of the picture. Trust from other government institutions and political leaders also increases when a central bank proves its ability to maintain financial and price stability. In this sense, central bank independence becomes a self-fulfilling concept: independence is necessary to achieve policy goals, but the only way to sustain true de facto independence is to meet those goals repeatedly.

 

I am frequently asked how the Central Bank of Russia manages to implement such tough policies and maintain its independence, especially under the current challenging circumstances. The answer is straightforward: we have repeatedly shown that our policies work and that we can fulfill our mandate. We have navigated several financial crises, consistently restoring financial stability. Moreover, it has become evident that our financial system was far better prepared for recent crises than for earlier ones. At the same time, between 2015 and 2022, we developed a track record of disinflation and keeping inflation under control. As a result, there is now a deeper understanding of how our policies function.

 

The third critical issue, which I would like to consider in this section, is the need for a careful balance between maintaining a robust policy framework and preserving the flexibility to adapt or devise specific measures when needed. The Bank of Russia is often perceived, both domestically and internationally, as orthodox or conservative. However, this is not without its merits. The policy framework we employ has demonstrated its effectiveness across multiple countries and rests on a solid theoretical foundation.

 

We adhere strictly to an inflation-targeting framework, maintaining a 4 percent inflation target. Our decisionmaking process, operational procedures, and communication policies closely mirror textbook examples of modern monetary policy. Unlike some central banks, we do not engage in foreign exchange interventions tied to specific exchange rate levels and rarely intervene in the FX market on our own behalf. In the spot FX market, our role is mostly limited to acting as an agent of the government, conducting foreign currency transactions only when mandated by the fiscal rule.

 

To ensure financial stability, we employ a range of standard instruments, which we deliberately separate from our monetary policy tools. We are transparent in our communication, clarifying how these instruments are used and the specific goals they are intended to achieve. Among our FX tools, we frequently use FX swaps to stabilize the market, much like other emerging market economies.

 

In terms of non-orthodox measures, we often resort to regulatory forbearance. During periods of high market volatility and uncertainty, we permit banks and financial institutions to apply less stringent regulatory norms or risk assessment requirements than our usual regulations require. This does not imply a lack of rules; instead, we issue temporary guidelines that allow institutions to avoid using volatile market values for certain assets and to refrain from altering risk assessments for some borrowers. We view these measures as temporary buffers against the impact of market volatility on financial system balance sheets.

 

Our experience with regulatory forbearance during recent financial crises has established clear expectations within the financial sector. Institutions understand that these measures are temporary and that we will exit them as soon as conditions permit. A swift exit is crucial, as prolonged use can lead to distortions and vulnerabilities within the financial sector by weakening risk assessment incentives. Therefore, we maintain a conservative approach to these non-orthodox tools, ensuring that normal regulatory practices are restored as quickly as possible.

 

For many years, we were firmly opposed to capital controls, believing that such administrative restrictions could impede market development and were often easy to circumvent. Instead, we relied on other instruments to mitigate financial stability risks when necessary. However, the landscape changed in 2022 when Russia was hit by sanctions, which, in essence, served as a form of external capital controls. In response, we reconsidered our stance and introduced capital account measures to stabilize the market and the economy.

 

When foreign investors from sanction-supporting countries were forced to sell their Russian assets, while numerous Russian investors had their foreign assets frozen, Russia implemented “C-accounts” for such foreign holdings of Russian assets. Essentially, this move froze the foreign-held Russian assets, helping to counterbalance the impact of the sanctions on our financial accounts.

 

In addition, in the spring of 2022, Russian exporters were required to sell 80 percent of their foreign exchange earnings on the market within three days after receiving them. This measure aimed to stabilize the FX market during the initial wave of panic. It was abolished in the middle of the year, but in 2023 the government reintroduced it and partially removed it recently.

 

Additionally, in early 2022, we imposed strict limits on foreign currency transfers abroad, affecting both private individuals and certain company operations. These restrictions were significantly eased as soon as market conditions allowed. Currently, only a cap on private transfers abroad remains, but it has been set at a relatively high limit of $1 million per month, allowing considerable flexibility compared to earlier measures.

 

The capital controls introduced in 2022, of course, contradicted our earlier policy framework. Before 2022, we had pursued a strategy of keeping the capital account as open as possible, gradually easing the remaining restrictions. However, faced with an exceptionally unusual set of circumstances, we were compelled to shift our approach to allow the market to adjust. Implementing these measures was necessary to address severe market dislocations that could not be rebalanced through conventional means.

 

Most of the restrictions introduced in March 2022 were abolished by mid-year. They were temporary tools for an extraordinary situation. The remaining measures are mostly “counter-sanctions,” and they limit sanction-driven capital flight and effectively create a policy space in which our standard instruments could function, even under non-standard conditions. Our overarching goal remains to minimize reliance on administrative controls and to give market forces the maximum room to operate.

 

To summarize, adhering to a well-defined, orthodox framework has been the key element of our policy for maintaining financial and price stability in Russia. This approach serves as the foundation for both our decisionmaking and policy communication, thereby fostering confidence in our strategies. In this sense, we might echo the title of a famous book by Carmen Reinhart and Kenneth Rogoff, This Time is Different (2009). We firmly believe that “this time is never different,” meaning that we should continue to adhere to our mandate and framework even in the most exceptional circumstances. The core principles of sound macroeconomic policy become even more valuable during challenging times. However, while the framework must remain intact as far as ultimate policy goals are concerned, it also needs to allow enough flexibility to adapt to non-standard market conditions when required. This balance between consistency and adaptability is crucial for navigating complex economic landscapes.

 

Challenges Ahead

Let me turn from past challenges to those that loom on the horizon, as the era of economic and geopolitical uncertainty is far from over. Looking ahead, several key challenges demand our attention. Foremost among them is the imperative to safeguard the market economy based on the competitive allocation of resources and capital between sectors and individual firms. Fair competition is the most potent driver of efficiency and productivity gains, which gives the Russian economy the flexibility and agility required to navigate today’s volatile environment.

 

The predictability of economic policies is also a challenge in the current environment. For the central bank, one of the most important factors is fiscal policy and its adherence to the budget rule. Otherwise, price stability would be more difficult to attain, and tighter monetary policy might be required. For businesses, clarity and effectiveness of economic policy are also important. Without them, companies would shorten their planning horizons, financial markets would demand higher risk premiums for holding Russian assets, and so on. This argument concerns not only fiscal policy but also other policies, including trade and industrial policies. Naturally, the Central Bank itself should continue to prioritize transparency, refine, and advance its communication strategy to meet the demands of the current environment.

 

Another challenge facing the Russian economy is preserving its innovative drive. With sanctions limiting access to modern technologies, the task at hand is not just traditional import substitution but a highly innovative one. Yet, this need for innovation coincides with the public’s demand for better jobs and a more prosperous future. To support wage growth in a tightening labor market, Russia must achieve gains in labor productivity. This imperative places a growing premium on innovation.

 

The Central Bank, in collaboration with the financial sector, is actively developing new financial instruments designed to spur product and technological innovation. Additionally, our policies focus on strengthening competition, which is the key driver of innovation.

 

Why are we, as a central bank, interested in the innovation drive within the economy? A slowdown in innovation and economic growth would significantly undermine the environment needed for sound monetary policy and financial stability. In such a scenario, inflation would become more volatile, and the financial sector’s balance sheets could deteriorate. This would impose undesired costs on the Russian people and businesses alike, notwithstanding the Central Bank’s response to these developments.

 

The outcome of 2024 clearly demonstrated that maintaining price stability amidst a rapidly changing external environment and significant structural realignment of the domestic economy is a formidable task. The Russian economy experienced very strong growth, but aggregate demand pushed significantly beyond the economy’s potential output, even as the latter’s advance accelerated on the back of strong investment gains. This was manifested first and foremost in inflation, which, for the fourth consecutive year, remained unacceptably high throughout 2024. Our steps to ensure appropriate firmness in monetary policy will bring credit expansion to a more balanced path in 2025. Aided by the normalization of fiscal policy towards the long-term parameters prescribed by the budget rule, monetary policy is determined to restore the price stability that was enjoyed by the Russian people and businesses between 2017 and 2020. We believe that the Russian economy will achieve this goal via a soft landing.

 

In conclusion, I want to address the vital importance of financial and price stability and why I firmly believe that central banks must prioritize these goals under all circumstances. Low inflation and financial stability secure the foundation for a stable monetary system, ensure effective mechanisms for financing both the short- and long-term needs of households, provide them with reliable savings instruments in their national currency, and support business development and innovation. These factors are fundamental to both economic development and social stability.

 

As the core of the payments and financial systems, central banks are uniquely positioned to fulfill these goals. No other institutions have similar instruments. At the same time, central banks are not equipped to pursue other objectives, such as supporting specific industries or social groups. Moreover, if they try to do so, price and financial stability would quickly be in danger. Therefore, central banks should remain focused on their primary mandate: maintaining monetary and financial stability, which is critical for the well-being of the economy and society at large. This is the best long-term strategy even in such a complicated environment as the one the Russian economy is facing today.

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