At the same time as an increase in key interest rates, the Central Bank of Russia revealed in a press release the unenviable phenomenon that threatens the country: stagflation, combining high inflation and slow economic activity, two factors caused by full-scale invasion of Ukraine.
The impact of the war in Ukraine on the Russian economy
The Russian economy underwent extensive restructuring following the large-scale invasion of Ukraine. If hydrocarbon sales were able to allow Moscow to maintain colossal budget surpluses at the start of the war, the growing impact of sanctions is gradually cutting Russia off from the rest of the world economy.
At the same time, the Kremlin is incurring heavy expenses to keep its military industry running and pay the salaries of its soldiers. The growing lack of men willing to go to the front and the political cost that a new mobilization would generate push the army to offer increasingly large sums to potential recruits. In addition, the workforce has dwindled following the exodus of millions of Russians and the sending to the front of hundreds of thousands of others, in a country with a demographic already in free fall, reducing the offer.
In an analysis translated by Bloomberg and the Moscow Times, the Russian Central Bank announced that the economy is heading towards slowdown, and this phenomenon is combined with strong demand, driven by state mechanisms such as a facilitated loan system.
In an attempt to curb the inflation born from this dangerous combination, the Central Bank of Russia has raised its key interest rate several times in recent months. But at this point”domestic demand still greatly exceeds the capacity to increase the supply of goods and services”, she analyzed in a press release dated September 13, and inflation continues to evolve well beyond the 4% mark, set by the financial authority. In response, the Central Bank announced a further increase in the key interest rate, this time to 19%.
Annual inflation should still reach “6.5 to 7%” at the end of the year, and remain between 4 and 4.5% in 2025.
Towards stagflation in Russia?
“There are signs of a slowdown in domestic demand. However, there is no reduction in inflationary pressure”underlines the Central Bank. Consequence: Russia could therefore move towards stagflation, a situation in which high prices combine with low economic growth.
Ukraine – Russia: military planes of the war
Stagflation is all the more feared because this double phenomenon is difficult to stop: weak economic activity pushes interest rates to lower to facilitate borrowing and consumption… at the cost of inflation which is reinforced. The rise in interest rates curbs inflation… but suppresses economic activity. The problem is thorny, and Russia does not yet seem to have found the solution that will allow it to avoid this formidable fate.
This article was originally published on September 30.
