High inflation and more expensive loans: Russia is on the verge of an economic crisis due to war and sanctions

29 October 2024 16:52
K. ANALYSIS

The Central Bank of Russia announced a sharp increase in the key interest rate by 200 basis points to 21% per annum, the highest level since February 2003. This decision, made on October 25, was the result of high inflation, which reached 9.8% year-on-year in September, exceeding analysts’ forecasts. In August, inflation was 7.5%.

The recent increase in the discount rate in Russia to 21% was a clear signal of overheating in the economy, which is a cause for concern. Economist Anatoliy Amelin, Executive Director and co-founder of the Ukrainian Institute for the Future think tank, analyzes the reasons and consequences of this decision exclusively for KU, linking it to excessive currency emission, war costs and structural challenges facing the Russian economy.

According to Amelin, the main reason for the overheating of the Russian economy is the intensive printing of money, which became necessary to finance the war.

“The war takes about 30% of the Russian budget, and to support these expenses, Russia was forced to use not only the National Welfare Fund, but also to print money,”

– Anatoly Amelin explains.

This has led to high inflation, which the authorities are trying to curb by raising the discount rate, Amelin adds. However, such containment may have side effects: loans for individuals and businesses will become more expensive, and investment projects will be unprofitable.

Stalled construction market and mortgage problems

To support domestic demand, the Russian authorities have introduced preferential mortgage programs. However, according to Amelin, these measures no longer work.

“The real estate market has already stopped growing, and people cannot take out mortgages, which indicates that the construction industry has lost its status as an economic driver,”

– Amelin comments.

Moreover, more expensive loans will only deepen this stagnation, which creates risks for employment in the construction sector.

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Shortage of skilled workers and technological isolation

A significant obstacle for the Russian economy has been the shortage of skilled personnel, which, according to Amelin, is difficult to overcome even by raising salaries. At the same time, Russia has limited access to modern technologies, especially in the oil and gas sector, where most of the service companies that provided drilling and maintenance were foreign and have left the Russian market.

“Technological isolation contributes to structural problems in the Russian economy,”

– adds the economist.

Loss of the European gas market and the role of the shadow fleet

Russia has almost lost its former position in the European gas market.

“Its share is now less than 15%, whereas the country used to be a monopolist. Therefore, Russia is trying to circumvent sanctions by using the shadow fleet to export oil. Such exports are now a critical source of foreign exchange earnings, covering up to 25% of the budget, but they risk facing further sanctions restrictions.”

Anatoliy Amelin

According to the expert, the situation is leading Russia to a gradual loss of economic independence.

“The further, the more the Russian economy depends on China, India and other countries”

Anatoliy Amelin

Russia continues to maintain its “public” image without recognizing these limitations, but this development points to the risks of further economic slowdown, the economist adds.

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Kremlin bots justify the Central Bank’s rate hike as a step towards the welfare of citizens

In an exclusive commentary to Kommersant Ukrainian , economist Igor Lipsitz explained the increase in the discount rate by the Kremlin’s inability to suppress inflation. At the same time, the Central Bank is only slowing it down a little and cannot reverse the vector, as money for the war continues to flow uncontrollably.

“Therefore, now Russians are facing a price increase that outstrips any growth in their earnings and devastates their consumer baskets. Russia will continue to be “afloat” as long as it is allowed to export oil. But the inhabitants of the “holds for the poor” will begin to “sink into poverty” next year.”

Igor Lipsitz

The economist drew attention to the campaign of bots trying to justify the decision of the Central Bank of Russia to raise the key rate to 21%.

“They emphasize the positive effects of high interest rates on the profitability of bank deposits. The bots urge users to check banking apps in search of favorable conditions, assuring them that this will not only save but also increase money, as the interest rate is higher than inflation,”

Igor Lipsitz

However, the economist emphasized that in the face of rising inflation and loan rates, bots actually blame the Russians themselves.

“One of the robots wrote that the rate will continue to rise because people continue to take out loans,”

– Igor Lipsitz noted.

Russian authorities are preparing for a fall in the ruble

Amid these news, the Russian stock market fell: the MosEx index dropped to 2666 points (-1.91%), and the RTS index to 869 points (-1.83%). Many shares of large companies on the Moscow Exchange lost about 2.9% in value.

In addition, it has become known that the Russian authorities are preparing for a possible fall of the national currency below 100 rubles per dollar, which could be beneficial for the budget in the context of the planned increase in spending. In particular, the State Duma has urgently allocated an additional 1.5 trillion rubles to finance the war in Ukraine.

Thus, the increase in the discount rate is a symptom of the fact that the situation in the Russian economy will deteriorate, Anatoly Amelin concludes. Although Russia has a certain margin of safety, today’s decisions may backfire in six months, causing a new wave of problems for Russian businesses and the population.

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Author: Anastasia Fedor

Остафійчук Ярослав
Editor

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