Moscow took sharp action on Friday to curb inflation, fearing the effects of higher spending on the war in Ukraine and a weakening Russian ruble.
Russia’s central bank took the unexpected step of raising its benchmark interest rate by a full percentage point from 7.5 percent to 8.5 percent. It was the first major increase in more than a year and the bank warned that further increases were likely.
“It’s surprising and on the face of it it reflects greater concern at the central bank about inflation and how the economy we admire is doing,” said Robert Kahn, head of the geoeconomics team at Eurasia Group, a New York-based risk analysis firm. “This suggests that the war is increasingly disrupting economic activity and increasing inflationary pressures.”
While the idea that the sanctions will cripple Russia’s economy has faded, the effects of the war are still rippling through the economy in other ways, including higher military spending, labor shortages and a steadily worsening trade balance, experts said.
Elvira Nabiullina, the central bank governor, made only oblique references to the war in announcing the increase. “Companies cannot immediately open new production lines and find additional employees,” he said. “When demand begins to steadily outpace the ability to increase supply, prices tend to grow exponentially.”
The bank forecasts that inflation will reach 5 percent to 6.5 percent this year, lower than at the end of last year, but still within its 4 percent annual target.
Experts pointed out several aspects of the game. First, it has weakened significantly against other currencies in the weeks since mercenary commander Yevgeny Prigozhin led his Wagner Group in a counter-insurgency in late June, rising from around 83 to 90 to the US dollar. As Russia imports massive amounts of goods, weaker prices push the ruble.
This is particularly problematic for Russia, as President Vladimir V. Putin has linked several social spending programs to the rate of inflation. “It’s a key plank of Putin’s doctrine that pensions and other payments will be kept in line with inflation,” said Charles Litchfield, deputy director of the Atlantic Council’s GeoEconomics Center. “They may not be able to afford it.”
No one knows exactly how much the government is spending on the military, for everything from new weapons to higher paychecks for hundreds of thousands of new soldiers. About one-third of government spending on defense and security-related matters is now classified, but there is no doubt that such spending is growing exponentially.
Mr Putin’s government has poured billions into producing weapons and supplies for the protracted war in Ukraine. It has showered the country’s citizens, including residents of Ukraine’s occupied territories, with subsidized mortgages and other social payments. At the same time, salaries and compensation payments to Russian fighters in Ukraine have pushed up average salaries, fueled inflation, and left many civilian enterprises struggling to attract workers.
The labor shortage was exacerbated by the exodus of hundreds of thousands of working-age Russians to protest the war or avoid mobilization. Some estimates put tens of thousands more dead on the battlefields of Ukraine.
At the same time it is making those huge expenditures, the government is earning less revenue from energy exports, though they remain significant. In June the central bank reported its first negative trade balance since 2020.
Additionally, Mr. Litchfield noted that the Russians have now transferred nearly $40 billion abroad since the start of the war in February 2022. After the invasion of Ukraine, the government severely limited the amount of foreign currency that could leave the country, but those controls have been gradually relaxed.
Mr. Lichfield’s government policy of spending more money than they are now earning underscores the potential for ever-higher inflation. “The Russian government is afraid of getting out of control because it’s pumping money into the economy,” Mr Litchfield said.
Overall, the central bank said the economy would grow by 2.5 percent this year, effectively recovering to “pre-crisis” activity levels, a euphemism for the period before the full-scale invasion of Ukraine. Still the growth forecast Ms. Nabiullina’s announcement also contains a note of caution.
“Our goal is not to allow that risk,” he said, adding that the Russian economy could go into overheat.
