With the Central Bank of Russia’s recent decisions and market expectations of further key rate hikes, speculation about a “Turkish scenario”—where Russia’s interest rates might reach 50%—has surfaced. However, such an outcome appears unlikely for several reasons, primarily because the starting conditions in Russia differ markedly from those in Turkey, where higher rates were already urgently needed due to persistently high inflation levels and structural differences in the banking sector.
Key Differences Between Turkey’s and Russia’s Economic Contexts
1. Inflation Levels and Monetary Response
- Turkey: Turkey began raising interest rates when inflation had reached alarming levels of 40% year-over-year and remained elevated between 40% and 80% for over 18 months. Such high inflation necessitated substantial rate increases to attempt to control price levels.
- Russia: In contrast, Russia raised its key interest rate when inflation reached 12% year-over-year in July 2023, following inflation trends proactively rather than reactively. Russia’s response was more measured compared to Turkey, adjusting the key rate immediately following inflation spikes, thus positioning itself more preemptively against inflation.
2. Banking Sector Composition and the Role of Foreign Currency
- Turkey: Turkish banks hold a high proportion of foreign currency in their assets and liabilities, with about 30% of assets and 60% of liabilities denominated in foreign currency. This high dollarization rate in Turkish banks limits the effectiveness of key rate hikes, as there is an alternative in the form of foreign currency borrowing and saving, which is less affected by the domestic rate.
- Russia: In Russia, the opposite trend is observed, with a de-dollarization of banking assets and liabilities. This gives the Central Bank of Russia (CBR) greater control over the impact of interest rate changes on economic activity, as domestic rate adjustments directly influence a larger portion of the banking sector.
Lessons from Turkey: Macroprudential Measures as a Supplement to Monetary Policy
While a 50% interest rate scenario is unlikely for Russia, certain aspects of Turkey’s macroprudential approach could inform Russian economic policy to manage inflation and financial stability without extreme rate hikes.
- Limits on Credit Growth:
- Retail and Corporate Credit Portfolios: In Turkey, regulatory limits are imposed on the growth of both retail and corporate lending portfolios, and these limits are subject to regular revision to maintain control over credit expansion. While Russia applies limits on retail credit, corporate lending regulation has been less stringent; however, initial adjustments have been announced.
- Higher Reserve Requirements:
- Reserve Ratios on Deposits: Turkey has increased mandatory reserve ratios on deposits to tighten liquidity and curb inflation. Raising reserve requirements for banks holding deposits limits the money available for lending and investment, reducing inflationary pressures. This tool is available to the CBR and may be employed as an alternative to more aggressive rate hikes.
Conclusion: Prospects for Russia’s Monetary and Macroprudential Policy
Given the structural and economic differences between Russia and Turkey, a “Turkish scenario” with a 50% key interest rate is improbable. However, Russia might still draw on Turkey’s macroprudential strategies to supplement its monetary policy efforts. Implementing such policies—like revisiting corporate credit regulations and adjusting reserve requirements—could provide Russia with additional tools to stabilize inflation without resorting to extreme interest rate hikes. These adjustments would likely be more effective in the context of Russia’s de-dollarized banking sector, where domestic policies have a more direct influence on credit and economic activity.
Ultimately, by balancing key interest rate decisions with macroprudential measures, Russia can manage inflation more sustainably and avoid the potential downsides of adopting the “Turkish scenario” in its entirety.
Author: Gazprombank Research
