clouds are gathering over the economy

Stubborn inflation, exorbitant bank loans, risks of bankruptcies and gloomy prospects: the bad news is piling up for the Russian economy, under the effect of three years of Western sanctions, the cost of the invasion of Ukraine and despite optimism proclaimed by Vladimir Putin.

Latest setback, last week: inflation accelerated to 8.9% in November, remaining deaf to the efforts of the Central Bank of Russia (BCR) which had raised its key rate to 21% in October – unprecedented since 2003 – to try to influence it. The Russian press, usually quick, like the Kremlin, to praise the resilience of the national economy, is now echoing growing problems, illustrated for example by the increase in the price of butter (+34% since January ).

Shortages

For Anton Tabakh, chief economist at the Russian credit rating agency Expert RA, “the inflationary wave” observed is the symptom “labor shortages and sanctions”two problems directly linked to the war. The lack of workers in the private sector, a reality for years in particular due to the demographic crisis, has been exacerbated by the departure of hundreds of thousands of men to the front, the flight abroad of hundreds of thousands of others, and competition from the military-industrial complex which needs hands to increase the rate of arms production.

This reality “slows down growth”told AFP Yevgeni Nadorchine, Russian economist and former advisor to the Ministry of Economic Development. According to him, Russia would miss “around a million employees”.

“Madness”

Inflation is favored by the budgetary policy of the Russian state, which spends lavishly to support its war effort (+67.5% budgeted in 2025 compared to 2021). The boss of the BCR, Elvira Nabioullina, who wants to prevent “the disease” of inflation “does not become chronic”could even decide on a further increase in the key rate on Friday, even if this possibility has already sparked an outcry from the big bosses.

At the highest in 20 years, interest rates for consumer and business loans are between 25 and 30%. “The economy cannot survive like this for long”scathed German Gref, CEO of the leading Russian bank, SberBank, in early December, noting “significant signs of slowdown” of the economy.

Even the head of the military-industrial conglomerate Rostec, Sergei Tchemezov, close to Vladimir Putin, described “madness” the level of interest rates, while Russian Railways (RZD) will reduce its investments by around 40% in 2025 compared to the current year. “The number of bankruptcies is about to increase sharply, especially in small and medium-sized companies, but also in large ones”warns Nadorchine, predicting that companies will no longer be able to repay their loans.

Deceleration in 2025

Faced with these headwinds, the Central Bank anticipates a pronounced deceleration in GDP growth in 2025, expected between 0.5 and 1.5%, compared to more than 3.5% forecast for the end of the year. For Evguéni Nadorchine, “unavailability of credit will immediately limit growth opportunities”. To the point of eventually seeing a cycle of stagflation emerge (low growth and high inflation)? «Non»sweeps away the BCR.

At the same time, in recent weeks, the Russian currency has weakened, a consequence of recent American sanctions targeting Gazprombank, which until now managed all payments from foreign customers purchasing Russian gas. The Russian currency is at its lowest against the dollar and the euro since March 2022, with the greenback currently trading for more than 100 rubles, therefore further threatening the purchasing power of Russians. However, there is no “no reason to panic”according to Vladimir Putin.

The Russian president is relying on a very low federal budget deficit, increasing non-oil revenues and the massive arrival of Chinese investors to replace Western ones. In this grayness, one thing seems clear: the future of the Russian economy will largely depend on the outcome of the conflict in Ukraine, amid speculation about the possible launch of a peace process with kyiv.