Russia’s economy is at risk of overheating, the country’s central bank warned as it hiked interest rates once again, casting a cloud over Moscow’s financial health.
The 100-basis-point hike to 16% was the fifth rate rise since summer as the central bank grapples with accelerating inflation, which rose to 7.5% year-on-year in November. Moscow has, nevertheless, outpaced expectations despite Western sanctions following its full-scale invasion of Ukraine.
Turbulent times ahead for Russia’s economy
Russia has a 70% chance of entering a recession in the next six months because of its aggressive rate hikes, one Bloomberg analyst predicted in October. Even so, high interest rates will help the central bank bring inflation closer to its 4% target by the end of 2024, the analyst argued. Moscow is underestimating how high inflation could rise, Goldman Sachs analysts argued in a note to clients. They said that as Russia approaches its presidential election in March, the Kremlin may seek to loosen fiscal policy, which could in turn increase inflationary pressures.
War spending drives Russian inflation
Russian President Vladimir Putin was forced to apologize to a pensioner for the price of eggs, which have soared 40% since the start of the year, during a rare and carefully orchestrated Q&A session last week. The Russian administration swiftly announced they would slash duties on 1.2 billion eggs. But the real cause of Russia’s economic malaise “remains the war in Ukraine,” the independent Russian economic outlet The Bell argued. Russia’s economy has been put on a war footing, with military spending set to take up a third of Russia’s budget in 2024.
Russia’s labor shortage will hinder growth
Russia’s GDP is on track to grow more than 3% in 2023 as a result of the highest defense spending since the collapse of the Soviet Union. But Russia cannot sustain such rapid growth with its current labor shortage, The Economist said. Hundreds of thousands of Russians have fled the country, and some economists predict that the labor market will be short of two to four million workers by 2030. More than 85% of Russian companies have reported staff shortages as unemployment has fallen below 3%. In an effort to expand the labor market, Russia has ramped up its use of forced labor, The Moscow Times reported.