It has been more than a month since Russia thought it could capture the Ukrainian capital Kyiv within 48 to 72 hours. Several news reports describe the Russian military operation as a halt, but detailed analyzes say otherwise. Ukrainian forces are attacking, and Russia appears to be losing its forces. in many places.
In an article written by Paul Krugman, and published by the American newspaper "New York Times", he said that Russia was able to defend one thing very effectively, which is the value of its currency, the ruble fell in the days after the start of the war on Ukraine, but it He has since regained nearly all of his losses, and Russia's economic officials appear to be more competent than their generals.
The writer shows that Elvira Nabiullina, the governor of the Russian Central Bank, is particularly appreciated by her counterparts abroad. Nabiullina reportedly tried to resign after the war began, but Russian President Vladimir Putin did not allow her to leave, so Nabiullina - forced - and her colleagues did everything they could To defend the ruble, they raised the key interest rate from 9.5 to 20%, to get people to keep their money in Russia, and they also imposed wide-ranging restrictions to prevent capital flight, and prevent foreign investors from getting out of Russian stocks.
The writer adds that it is not puzzling to see the ruble recovering under these strict measures, but the question is why Russia is ready to defend its currency at the expense of all other goals?
After all, aggressive measures to stabilize the ruble will likely deepen what already looks like a downturn in Russia's real economy.
The writer highlighted one of the classic proposals in international economics known as the "impossible trinity", where he said that the idea is that there are 3 things that a country may want from its currency:
First you may want to stabilize the value of a currency against other currencies, to create greater certainty for businesses.
Secondly, it may want the free movement of funds across its borders, to facilitate business.
Third, you may want to retain monetary discretion, the ability to lower interest rates to fight recession or increase interest rates to fight inflation.
strict restrictions
The writer explains that the “impossible trinity” says that you cannot have everything, and you have to choose two out of three, giving the example in Britain, where there are open capital markets and independent monetary policy, but this means allowing the value of the pound to fluctuate, or like countries that have adopted the euro , in which there is free movement of capital and stability of the currency, but by giving up monetary independence, or like China, where the currency is stable and there is a special monetary policy, but by maintaining capital controls.
The writer points out that the baffling in Russia is that it decided to take only one, unlike the rest of the countries that take two out of three, it has imposed strict capital controls, but it has also sacrificed monetary independence, and raised interest rates dramatically in the face of the looming recession horizon.
The writer assumed that Russia will witness a massive rise in inflation and a decrease in GDP in the coming months, and the Russian government is likely to not recognize this, as authoritarian regimes often try to suppress unfavorable economic data, if the Russian economy deteriorates as badly as most people expect in the In the near future, it seems very likely that the repressed media in the country will simply deny that anything bad has happened.
He points out that one thing is undeniable and the ruble has depreciated dramatically, so defending the ruble, regardless of the real economy, makes sense as a propaganda strategy.
The writer emphasized - in the end - that Russia's defense of the ruble, while impressive, is not a sign that the Putin regime is handling economic policy well, but rather reflects - instead - a strange choice of priorities, and may in fact be another sign of The flaw in Russian politics.