Russia is prepared to continue the war against Ukraine for more years, even if it plunges its citizens into poverty. Inflation is growing unchecked while the Kremlin burns the money it receives from hydrocarbons in its army and weapons factories. Companies cannot find workers and almost everything is imported from outside. Unable to attract employees, the private sector is forced to pay off-market wages. “The upward deviation of the Russian economy from balanced growth remains significant. Proof of this is the high inflationary pressure,” the Russian central bank warned this Friday by raising interest rates to 21%, its historical maximum under Putinism, a border that it did not expect to cross in its forecasts. “The Bank of Russia admits the possibility of raising the rate at its next meeting,” warned the body led by Elvira Nabiúllina, the economist who saved the Kremlin from collapse at the beginning of the war.
Unlike February 2022, when the institution raised rates to 20% for just two months as a shock measure against the first sanctions and the collapse of the ruble, this time it has gradually tightened its monetary policy throughout 2024 and has no signs of slackening in the short term. “Inflation expectations have increased significantly,” the central bank noted in its statement. And he is clear that the Kremlin is responsible, although he does not explicitly mention the war. “The growth of domestic demand significantly exceeds the possibilities to expand the supply of goods and services. “Additional budget expenditures and the resulting expansion of the federal budget deficit in 2024 have inflationary effects.”
“The Russian economy can sustain itself for years and the State will be able to maintain its war. And he will do it,” Antón Barbashin, director of the Riddle analysis center, responds to this newspaper by phone. “The Russians are going to have more difficulties, people will bear a greater burden and they will sell what is necessary, but the country can endure,” adds the expert. Putin replaced his Defense Minister, Sergei Shoigu, this year with economist Andrei Belousov to prepare for a long war, according to sources close to the army.
Barbashin believes that “Russia has been quite successful in adapting to a war economy, but it is under great stress.” His forecast is that the cost of living will be higher for Russians, but there will not be a crasheconomic “unless gas and oil prices collapse, and Russia does not have a constant flow of dollars and euros.”
One third of the budget, to war
The 2025 budgets maintain a continuous line with this year’s, with more than a third of the budget dedicated to war and security services at the cost of more taxes, more social cuts and dependence on gas and oil revenues: Moscow estimates that it will sell a barrel of crude oil to its partners this year at $70, $10 more than the limit imposed by the West.
The Russian authorities have the statements of the American politician John McCain in 2014 written in stone as a grievance: “Russia is a gas station pretending to be a country.” Some analysts thought that the country was still the ossified Soviet Union, but the sanctions did not bring it down. Furthermore, Western countries have to some extent bypassed these punitive measures: several European banks still operate in Russia and Europe imports Russian hydrocarbons through India. They were also applied very slowly: the price limit on Russian crude oil was not imposed until 2023, and the floats in the shadow of Kremlin tankers is still active. A week ago, the United Kingdom vetoed 18 ships that were clearly known.
In any case, the sanctions have undermined Russia in its invasion of Ukraine and have made it impossible for it to access a larger arms market. Beyond its internal production, its ammunition today comes from the ancient arsenals of North Korea and Iran.
An overheated economy
“Imagine the economy as a car. If we try to go faster than anticipated by the design of the car, sooner or later the engine will overheat and we will not get very far,” warned the president of the Russian central bank in December 2023, when rates were still at 16%. The Government, however, accused the economist of hindering the economy and causing the devaluation of the ruble – at the end of 2022 it was trading at less than 70 rubles per euro, this year it exceeds 100 – with her monetary policy.
Russia recorded a seasonally adjusted inflation increase of 9.8% in September from a year earlier, far from the 4% target. However, the shopping basket and other products reflect much higher increases.
Paradoxically, the central bank notes that the economy is cooling at the same time that inflation is skyrocketing. The gross domestic product grew by 4.1% year-on-year in the second quarter, when in the previous four quarters it exceeded 5%, and this trend has continued downwards in the summer to the 2.4% recorded in August. According to Nabiúllina, one of the reasons is that the conditions for sending payments abroad have been tightened. In fact, many Chinese banks have started rejecting transfers with Russia since the summer.
“Stagflation [una situación en la que la se combina estancamiento económico con inflación] now seems the most likely scenario for the Russian economy. “Spending and demand in the investment and military-industrial sectors continue to grow, but civilian industries cannot meet the parallel growing demand of the private sector,” notes the think tank Re:Russia in another analysis. This forces imports from abroad, which means bidding more due to the limited inflow of foreign currency, which devalues the ruble and makes products more expensive for the population. Result, stagflation, a problem that feeds on itself and impoverishes Russians even more.
“They are raising my salary, but I have the feeling that I am not earning more,” several Muscovites have repeated to this newspaper in recent times. According to the Ministry of Finance, the average salary will rise by 17% this year, from 74,854 to 88,285 rubles per month —841 euros at the current exchange rate. The problem is the distribution: a soldier earns 200,000 rubles a month plus a bonus of two million upon enlistment. According to the state statistics agency Rosstat, only 11% of Russians overcome mileurism [más de 100.000 rublos] and seven out of ten earn less than 60,000 a month [el alquiler de un piso muy modesto en Moscú].
“Money is not the problem. You can print money. What you can’t print are people or resources,” says Nicholas Tricket, an expert on the Russian economy and raw materials at the Foreign Policy Research Institute, in another analysis published by Riddle. Every import that could benefit the war comes at the expense of another sector. The process appears to be accelerating structurally, although in a manageable manner for the moment.”
Russian authorities are trying to stop a credit bubble that has been fueled by the imbalance between inflation and wage growth. The Kremlin has ended loans on preferential terms and interest rates are passed on to banks. Sberbank, the largest financial institution in the country with more than 106 million clients, has just raised the interest on its mortgages to 25% and asks for a deposit of 50% of the value of the home.
“The biggest problem is the workforce. The economy is under stress because of people going to war, and war needs more people. And if another mobilization occurs, there will be enormous tension in the system,” says Barbashin. It is the same thesis defended by the Russian central bank and other experts.
Unemployment fell to 2.4% in August, a record low. “Labor shortages are increasing across a wide range of industries. “Wage growth continues to outpace labor productivity growth,” warns the central bank. A problem for Russian society, although not for the Kremlin, which has a model to follow in Belarus and North Korea: where there is poverty, the police and the army are a stable job option.
“The Russian economy has reached its production limits. That’s not military keynesianismbut a war expense that acts like a slow-acting poison,” says Tricket.