Russia’s economic expansion is expected to slow according to the Central Bank, which has announced a dramatic increase in key interest rates to curb emerging inflation and the overheating of the economy following Vladimir Putin’s large-scale invasion.
Russia’s central bank has raised the interest rate at which other banks can borrow from 16% to 18%, close to the 20% announced at the start of the war, and the bank’s governor, Elvira Nabiullina, has ruled out further increases.
Nabioullina has steered the Russian economy through turmoil through Western sanctions aimed at stifling Putin’s war machine. Newsweek has reached out to Russia’s central bank for comment.
While the Kremlin can boast a projected GDP expansion of 2. 9% this year, that expansion has been fueled by record military spending on the war. Huge troop losses and the exodus of others fleeing conscription have led to a shortage of hard work that is fueling wages. and inflation as new macroeconomic disruptions loom in the coming years.
“The inflationary risks associated with sanctions have materialized,” he said at a news conference on Friday. This calls for “further policy tightening” to curb existing annual inflation of 8. 6 percent.
“Initial plans to start cutting rates at this time had to be abandoned because inflation showed symptoms of squandering control,” Bartosz Sawicki, a market analyst at Conotoxia fintech, told Newsweek.
“Instead, further tightening of financial policy had to be applied to cool the overheated war economy,” he said. “Military spending, which accounts for about 7% of GDP, has led to serious macroeconomic imbalances, which are starting to take their toll. “
Nabiullina predicted that Russian GDP would grow fourfold this year but fall in 2025 to a peak of 1. 5% or 0. 5 in the worst-case scenario, eight times less than the forecast for 2024.
“The overheating of the economy remains considerable,” he said, adding that reserves of hard work and production “are almost exhausted. “
These points mean that the expansion may simply slow regardless of attempts to stimulate demand. “This stimulus will only further increase inflation,” he said. “This is a stagflation situation that can only be stopped by a deep recession. “
Stagflation is the simultaneous occurrence of slow growth, peak unemployment, and emerging prices. He said Friday’s resolution “will avoid that scenario. “
This comes as customer value inflation (CPI) rose for the sixth consecutive month. Sawicki said the bank’s intention to reduce that rate to 4% until the end of next year is “threatened through foreign sanctions that lead to higher cross-border payment prices and higher fuel values. “
“This can be attributed to refinery capacity disruptions caused by Ukrainian drone attacks,” he added, referring to kyiv’s intensifying attacks on the infrastructure of major Russian exports.
Brendan Cole is a senior journalist at Newsweek based in London, United Kingdom. He focuses on Russia and Ukraine, that is, on the war through Moscow. He also covers other areas of geopolitics, including China.
Brendan joined Newsweek in 2018 from the International Business Times and, in addition to English, studies Russian and French.
You can contact Brendan by emailing b. cole@newsweek. com or following him on his X account @brendanmarkcole.
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