Russian central bank head warns of turbulent times ahead despite slowing inflation

By Elena Fabrichnaya and Gleb Bryanski

ST PETERSBURG, Russia (Reuters) -The Russian economy has adapted to Western sanctions and inflation is now slowing, but turbulent times and major technological shifts lie ahead, central bank governor Elvira Nabiullina said on Wednesday.

Despite the sanctions, the Russian economy grew by 4.3% last year but is set to slow sharply in 2025, with many officials and economists saying that the current model has exhausted its growth potential.

"We have adapted to some external challenges (but) no, we are facing very turbulent times ahead," said Nabiullina, who is widely credited with steering the Russian economy through the Ukraine military conflict and resulting sanctions.

"But I am confident that this also presents new opportunities for development and for increasing labour productivity in conditions of expensive labour. We base our efforts on this," she told a banking conference.

She stressed that the high cost of labour - spurred by the military spending that has led to a wage growth spiral in many sectors, as well as by curbs on immigration - would remain for a long time.

Nabiullina said the economy should in future rely entirely on domestic sources of financing as cheap funding from abroad, abundant before the Ukraine conflict, is no longer available.

"In my view, structural adaptation to external constraints has been completed. We have demonstrated our ability to adapt to these challenges, but now we are facing structural shifts of an entirely new kind, primarily technological ones," she said.

"They may have even more far-reaching consequences than what we experienced over the past two years," Nabiullina said, mentioning artificial intelligence applications in the economy as one such challenge.

INFLATION SLOWING

The central bank, which has faced heavy criticism over its tight monetary policy, began cutting its key interest rate last month as prices started to come down, helped by the rouble's strength.

Nabiullina said inflation is now slowing faster than the central bank expected, and there are signs of easing in the severity of labour market shortages.

She said that if economic indicators pointed to a more significant slowdown than anticipated, the central bank would have room for bolder interest rate cuts. She dismissed statements by critics of the bank, who want deeper cuts, that the cooling of the economy was excessive.

Nabiullina also rejected statements from many businessman and bankers that the rouble is now overvalued and should weaken to please exporting companies, which saw their revenues shrink as the rouble rallied by over 40% against the dollar this year.

"A weak exchange rate is often a sign of vulnerability, a result of chronically high inflation and a lack of confidence in one’s own currency. It is hardly something to strive for," she said.

(Reporting by Elena Fabrichnaya, writing by Gleb Bryanski; Editing by Mark Trevelyan)