The Russian economy has been in trouble for some time and there are no indications that it will improve any time soon.
The inflation rate is still high, the interest rates are at record levels, and spending on wars has stretched resources to their limit.
Vladimir Putin recently acknowledged that the Russian economy was overheating, and inflation in Russia is alarming.
Since mid-2024, the Russian central bank has aggressively raised its interest rates. Its mandate is to tame inflation and stabilize ruble.
Their goal, however, is not on target. The risks that the economy of the country will continue to sink deeper in trouble are increasing.
What is the inflation rate in Russia?
The Russian inflation rate reached 9.5% by December 2024. This is far higher than the target of 4% set by the Central Bank.
Food inflation has reached 10.93%, a record high.
According to the Russian Economy Ministry, vegetables alone have increased in price by 24% compared with a year earlier.
The consumer inflation expectation has risen to 13,9%. This is the highest level in over a year. It reflects a declining trust by consumers in price stability.
The ruble, which has been trading for more than $100 per dollar, is now down over 20 percent in value from the summer.
Western sanctions against energy exports, and financial institutions, such as Gazprombank have caused the ruble to fall further.
The cost of sanctioned routes has increased, causing inflation to rise.
Record interest rates for Russia
In October 2018, the Bank of Russia increased its benchmark rate from 11% to 21%, which is the highest level since 2022 immediately after the invasion of Ukraine.
The policymakers are ready to raise rates further, if the inflation pressures continue.
Most analysts were surprised by their decision to stop their cycle of rate hikes in December.
The decision was influenced by pressure from the political establishment, and rates remained unchanged, even though earlier predictions had indicated a rate hike of up to 24 % or more.
Businesses and consumers have been hit hard by the rising borrowing costs.
RBC Real Estate statistics show that renting a Moscow one-bedroom apartment now costs 74% of an average salary. This is up from 63% just two years ago.
Subsidized loans and mortgage lending have both been significantly slowed.
The Russian economy is being flooded by war spending
The Russian economy, driven by war and a high demand for goods, is in a state of overheating.
Defence manufacturers hire workers around-the-clock at high wages.
According to the job website Headhunter, some salaries rose by as much as 45% in this past year.
The labor shortage has caused the civilian industry to struggle with filling positions. This further slows down productivity.
The government’s spending on defence has also caused economic distortions.
It is not a sustainable or innovative way to grow.
Alexander Novak, Deputy Premier of Russia, recently said that Russia is facing a shortage in skilled workers. This includes those working in the construction industry, transportation, and utilities.
Ukraine leads the economic war
Ukraine’s economic situation, despite being battered from war, has proven to be more flexible than Russia’s.
The National Bank of Ukraine projects a GDP increase of 4.3% by 2025 and 4% by 2024, following a 30% decline in 2022.
The hryvnia is holding its value and strong reserves of foreign currency are expected to reach $43 Billion by the end of this year.
Rates of interest remain unchanged at 13.5%
The key sectors are changing gears. The industrial parks in western Ukraine provide safer bases for operations.
To counter Russian attacks against the grid, businesses have invested in biogas and renewable energy.
Ukraine has also used innovative maritime drones to reopen grain and metals exports. This is a vital source of foreign exchange.
Another important factor has been international aid. IMF, G7 and Ukraine pledged significant financial assistance to cover Ukraine’s projected budget deficit of 20% in 2025.
By the year 2024, Ukraine is expected to have accumulated foreign currency reserves of $43 billion. This will provide a cushion against future shocks.
What is next for Russia’s GDP?
The economic prospects for Russia are bleak. IMF predicts that GDP will slow down from 3.6% growth in 2024 to only 1.3% growth in 2025.
The central bank has been warned that aggressively raising rates could hurt the economy without reducing inflation.
Many companies are struggling to get credit. This has led to fears about bankruptcy and investment slowdowns.
The economic impact of sanctions continues to be heavy, forcing both importers and exported to find expensive workarounds.
Overheating is a risk, as the Bank of Russia has acknowledged that “far too much money” is being poured into the economy.
Is the Russian War Economy Sustainable?
Vladimir Putin expressed concern about an overheated economy, but remained committed to war efforts.
Many critics in Russia, such as influential oligarchs have said that current trends are unsustainable.
Hiring in the defense sector is diverting workers from other industries that are more productive, while high borrowing costs are slowing down private-sector development.
According to some analysts, the worsening of economic conditions may prompt the Kremlin reassess their strategy.
Former senior Russian officials have drawn parallels with the Soviet Union’s collapse, due to mismanagement of economic resources and a race to arms.
Putin was said to be considering ending the war in order to avoid further economic collapse.
Russia’s economy, which is largely driven by war, may continue to function for several more years. However the cracks in its foundation are getting harder to ignore.
The central bank is losing its effectiveness as a result of inflation, shortages in labor, structural inefficiencies, and other factors that are depressing the growth.
It isn’t a question of whether or not the Russian economy will survive, but rather for how long.
The post Russia’s economic fragility: Can it sustain war effort? This post may change as new updates occur
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