Key Points and Summary – Russia is grappling with severe inflation, forcing its central bank to maintain a punishing 18% key interest rate to cool down the wartime economy.
-This inflation is fueled by a perfect storm of a depreciated ruble due to Western sanctions, a labor shortage from military conscription, and massive government spending on the war in Ukraine.
-This has created an internal conflict between economists at the central bank and the Kremlin’s war machine. While the high interest rates are beginning to tame prices, this success is coming at the expense of “anemic” economic growth, creating a high-stakes gamble for Moscow.
Russia’s Inflation Crisis Explained
One thing the U.S. and Russia have in common? Both are dealing with inflation, with the central bank’s decisions on rate cuts under heavy scrutiny.
Reuters reported this week that, due to high inflation, Russia’s key interest rate is currently at 18 percent, although a cut is possible.
A senior official at the bank said this week that the central bank “may be able to cut its key interest rate from 18% this year if inflation slows rapidly, but it does not rule out holding it at that level in order to achieve a sustainable slowdown in price growth.”
Per Reuters, Andrei Gangan, this week told government newspaper Rossiiskaya Gazeta that “the baseline forecast was for 6-7% inflation in 2025 and 4% in subsequent years.”
This “implies,” he said in the interview, an average key rate of 16.3-18 percent and 12-13 percent next year.
“The average rate will most likely be in these ranges. However, the specific value, say, at the end of the year, may fall outside this interval,” Gangan told the Russian newspaper. “For example, if events develop favourably – that is, if inflation slows down rapidly – the rate may decrease further this year, and the forecast range takes this into account.”
The inflation target is 4 percent.
“Inflationary risks remain, including from geopolitics, and we will make further decisions cautiously, based on incoming information,” he said.
Whether It Matters
Back in February, The Economist looked at the question of how much Russia’s inflation matters.
“While inflation has cooled almost everywhere, in Russia it is heating up,” the publication said.
“Consumer prices rose by 9.5% year on year in December, up from 8.9% the previous month and uncomfortably above the central bank’s target of 4% (see chart). The prices of fruit and vegetables have risen by more than 20% on average in the past year. In a normal country, this sort of high inflation would be unsustainable. But Russia is not a normal country.”
There are a few reasons for Russia’s inflation. The ruble has depreciated, particularly as Western sanctions have intensified. There has also been a labor shortage, brought about by continuing military conscription.
Therefore, there is now a disagreement within Russia’s political establishment over what to do.
“The central bank—stuffed with orthodox economists—is desperate to cool prices. On February 14th, following a monetary-policy meeting, it is expected to keep interest rates at 21%, their highest since the early 2000s,” The Economist reported in February.
“It has also tightened credit rules. But those close to Mr Putin have other ideas. The vast military budget keeps coming in much higher than planned, and now equals around 7% of gdp. The government is doling out huge sums, including as signing-on bonuses to soldiers and compensation to families when their relatives are killed in action. It is also pressganging the private sector into funding the armed forces, which amounts to a form of stimulus.”
Less Inflation, Less Growth
According to a Business Insider report this week, which cited the work of think tank Center for European Policy Analysis, Russia’s war on inflation is starting to work, although it’s come at the expense of economic growth.
“Current inflationary pressures, including underlying ones, are declining faster than previously forecast,” Russia’s central bank said last month. “The economy continues to return to a balanced growth path.”
However, Alexander Kolyandr, a senior fellow at the Center for European Policy Analysis, told Business Insider that the central bank’s protestations are merely “a euphemism for anemic growth.”
“For the Kremlin, a brief period of low growth is tolerable, though combined with lower oil prices, it would reduce fiscal revenues,” Kolyandr wrote in a recent report. “The main gamble is that the cooling of the economy won’t trigger a prolonged recession.”
About the Author: Stephen Silver
Stephen Silver is an award-winning journalist, essayist, and film critic, and contributor to the Philadelphia Inquirer, the Jewish Telegraphic Agency, Broad Street Review, and Splice Today. The co-founder of the Philadelphia Film Critics Circle, Stephen lives in suburban Philadelphia with his wife and two sons. For over a decade, Stephen has authored thousands of articles that focus on politics, national security, technology, and the economy. Follow him on X (formerly Twitter) at @StephenSilver, and subscribe to his Substack newsletter.
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