Russia's central bank is expected to raise its key interest rate beyond its record 21 percent on Friday, as policymakers struggle to slow inflation in what Vladimir Putin describes as a “hot” war economy.
Elvira Nabiullina, the hawkish governor of Russia's central bank, the CBR, is facing a growing chorus of criticism from officials and oligarchs who say her efforts to curb inflation are stifling business. His insistence on inflation as inflation spirals out of control of the bank highlights how policymakers have failed to balance priorities that cannot be resolved in time. waraccording to major Russian businessmen and economists.
“Either you have high spending, or a stable foreign exchange rate with the market the economy,” said a former senior energy executive. “You have to give up one of those. You can't have it all at once.”
Demand continues to outstrip supply, and the central bank has limited resources beyond higher interest rates to deal with inflation amid low unemployment and weak output.
Many economists predict inflation to reach 10 percent by the end of 2024, driven by a splurge on defense spending and a corresponding boom in the consumer sector. The CBR estimates annual inflation at 9.6, well above the target of 4 percent.
The ruble has slipped about 20 percent since the summer to trade around 103 to the dollar, hit by sanctions that restrict Russia's energy exports and ability to trade internationally. Unemployment hovers at just 2.3 percent as defense manufacturers work three shifts around the clock, offset by ever-increasing budget spending, and the civilian sector struggles to keep up.
The economy was receiving “much more money than it can 'digest',” the CBR said in its latest report from early December.
CBR's interest rate hike from 16 percent in July has drawn many prominent critics into the open in recent months, including Putin's long-time associate Igor Sechin, head of oil company Rosneft, and Sergei Chemezov, who runs defense maker Rostec. On Wednesday, Sergei Mironov, the head of the opposition party in the Kremlin, accused Nabiullina of “disappointment” and said that his price hikes have worsened inflation.
Nabiullina, 61, has led Russia through several economic crises since taking office in 2013, including the 2014 financial crisis that followed Putin's annexation of Crimea and the resulting full-scale invasion of Ukraine in 2022.
That has given him wide latitude from Putin, who has accepted criticism but continues to privately support him, according to people familiar with the matter.
At his annual press conference on Thursday, Putin acknowledged “inflation” and “some overheating of the economy”, but said that “the government and the central bank have already been given the responsibility to slow down.”
Putin's bluster while Russia maintains the upper hand on the Ukrainian battlefield masks growing concerns about how long the Kremlin can sustain the war, according to a senior Russian official. “You can hang around for two or three years like this. But you know that the economy cannot grow at this rate. It is a disaster.”
The bleak economic outlook could prompt Putin to strike a deal to end the war sometime next year, they added. “You know the USSR collapsed because of an arms race and economic mismanagement. He always says that we cannot repeat the mistakes of the USSR. He must stop the war,” said the former senior officer.
Many signs point to serious problems in the economy spend a lot of money It will struggle even more for masks, economists say.
One is the growth in wages of unskilled workers resulting from employment in the defense sector. Some salaries rose as much as 45 percent in the first half of this year, according to Russian classifieds site Headhunter.
“Your printer has been lured away from the defense industry for a huge salary,” said the former senior energy executive. “Now nobody is going to hire or you have to raise wages, and how are you going to make money?” Interest rates are so high that you can't borrow money and construction materials are at a standstill.”
Elina Ribakova, a senior fellow at the Peterson Institute for International Economics, said the project was aimed at “throwing people on the front line and producing Kalashnikovs.” That is not productivity growth. “
Skilled workers are also in short supply. Russia faces a shortage of 1.5mn highly skilled workers, particularly in construction, transport and utilities, deputy prime minister Alexander Novak said earlier this month.
The ruble's recent slide also points to how Russia's economy is coming under greater pressure as western sanctions target Moscow in more creative ways.
Last month, the US blacklisted Gazprombank, Russia's main energy exporter and one of the few lenders not subject to western sanctions. The list closed one of Russia's few windows open to the global economy with the Swift payment system, forcing traders and exporters into complex and costly international cooperation.
The economy was “overwhelming because the big commissions of the middlemen” involved in these transactions were increasing the price “everything”, said a person involved in international payments. “There's nothing you can do about it, and it's a big problem for the economy.”
Ordinary Russians are the ones who feel the greatest financial strain. Across the country, the price per square meter of housing has increased since the beginning of the war by 30 percent, according to SberIndex, a set of data compiled by Russia's largest bank.
This, combined with rising mortgage rates and freezes on subsidized lending, has put the dream of owning a home out of reach for many. “I really regret not taking out a loan when rates were low. Now it seems we will never be able to afford it – at least not in this country,” said Arina, a 30-year-old single mother from Moscow.
Unable to buy an apartment, Russians rush to rent. In Moscow, renting a one-bedroom apartment now requires nearly 74 percent of the city's median income — up from 63 percent just two years ago, according to RBC Real Estate data.
The realities of running a wartime economy meant Nabiullina had few options, Ribakova said.
“You can try to intervene in loans to finance military and industrial buildings. “No one will allow him to do that,” he said. “That's not the main thing. The main factor is strong growth in manufacturing and the military industry, so inflation is secondary. “