Russia faces inflation struggles amid ‘overheating’ war economy

BERLIN: Russia’s central bank is poised to raise its key interest rate beyond the record 21% as it grapples with inflation in what President Vladimir Putin describes as an “overheating” war economy, said Financial Times.

Elvira Nabiullina, the hawkish governor of the Central Bank of Russia (CBR), faces increasing criticism from officials and oligarchs who argue that her rate hikes are hampering business.

Inflation is projected to reach 10% by the end of 2024, fueled by a surge in defense spending and a booming consumer sector, with the CBR’s current estimate at 9.6%, far above its target of 4%. The rouble has depreciated by about 20% since summer, trading at approximately 103 to the dollar, impacted by sanctions against Russia’s energy exports.

Despite nearly full employment at 2.3%, the economy is overwhelmed with cash that the CBR argues it can’t “digest.” Opposition voices, including Putin allies, have accused Nabiullina of “sabotage” for her continued rate increases.

While Putin has acknowledged the economic challenges, he remains privately supportive of Nabiullina amid ongoing criticism. Some analysts suggest that the worsening economic outlook might prompt Russia to seek a resolution to the war in Ukraine next year.

The nation faces serious issues, including rising wages in the defense sector straining other industries, significant shortages of skilled labour, and heightened difficulties in international trade due to expanded sanctions.