Vladimir Putin has been touting his economy’s resilience at his annual showpiece conference in St. Petersburg this week, but his own officials are telling a very different story.
The Central Bank of Russia (CBR) issued its sternest warning yet on Friday that it may have to resort to even higher interest rates to stop inflation getting out of control, as the costs of sustaining the Kremlin’s war in Ukraine cause the economy to run red hot.
“Domestic demand continues to significantly outstrip the possibilities of expanding the supply of goods and services,” the CBR said in a statement after its regular policy meeting. The CBR left its key interest rate unchanged at 16 percent but said it may raise it at its next meeting in July, given that the short- and medium-term inflation outlook had worsened.
At first glance, Russia’s official statistics paint a picture of rude health. Gross domestic product was up 5.4 percent in the first quarter from a year ago.
But the figures routinely used to measure the performance of a peacetime economy have limited use in a war economy. The U.K. government estimatesthat 40 percent of Russian state spending, or 6 percent of GDP, is being diverted to support the war, leaving other areas of the economy such as health and education badly under-resourced.
The CBR’s steady tightening of monetary policy in the second half of last year had appeared to bring inflation back under control by early 2024. However, it warned on Friday that that is not the case. Underlying inflation started to accelerate again in April, and consumers, businesses and financial markets all expect it to remain high. Those expectations, it said, are creating “inertia,” the dreaded spiral where wages and prices chase each other higher.
The biggest problem is a shortage of workers, the CBR said. Registered unemployment has fallen to an unheard-of 2.6 percent of the population, well below the level usually considered consistent with full employment. That in turn has sharply increased workers’ bargaining power: real wages (that is, adjusted for inflation) were up nearly 13 percent on the year in the first quarter.
“Those who were not creditworthy yesterday are becoming creditworthy, and they’re starting to take on more debt even though credit rates are rather high,” German Gref, the head of the country’s largest bank and a stalwart of Putin’s economic team for over 20 years, told the upper house of parliament on Monday.
Gref wades in
In a rare outburst in the usually tame Federation Council, Gref rounded on the central bank’s critics, warning that high interest rates are needed because the economy is “certainly and strongly overheating.”
“There is no other way,” state news agency Interfax reported Gref as saying. “We know what happens, and how it ends when, for political reasons, rates are not raised. The latest example is Turkey.”
Inflation in Turkey is running at more than 75 percent, the result of years of massive deficit spending by President Reçep Tayyip Erdoğan. While that spending helped Erdoğan win re-election in 2023, the ensuing inflation was a major factor behind emphatic defeats for his AK Party in local elections in Istanbul, Ankara and other cities earlier this year.
Like Erdoğan, Putin also secured reelection this year — though that contest was widely panned as a sham — but his political allies regularly have a harder time keeping a lid on civilian discontent at regional level. Putin recently indicated a suite of tax hikes aimed at keeping down the budget deficit and, indirectly, inflation.
However, Putin’s ministers insist they can keep the economy going for a long time yet. Successive rounds of western sanctions have had uneven and often only temporary impacts, they argue.
Additionally, Russia’s external accounts — the bedrock of the prosperity that Putin has overseen since first becoming president in 2000 — remain solid, as it continues to find willing buyers for its energy and food exports in China, India and other developing and nonaligned countries.
“Russian crude [oil] is still being supplied to Europe, and certain products are still delivered to the United States,” Deputy Prime Minister Alexander Novak told the TV channel Al Arabiya on Thursday. “Metals necessary for aircraft production are still being sent to France. So, even now, the Russian economy is not isolated.”
