Russia’s Central Bank on Friday raised its key interest rate from 18% to 19%, a widely anticipated move as the country struggles to cool down inflation amid soaring military spending for the war in Ukraine. “Current inflationary pressures remain high. By the end of 2024, annual inflation is likely to exceed the July forecast range of 6.5–7.0%,” the bank said in a statement. “Growth in domestic demand is still significantly outstripping the capabilities to expand the supply of goods and services.” For that reason, the bank explained, “further tightening of monetary policy is required” so that the government can reach its inflation target of 4%. While stating that inflation was likely to exceed its previous forecast for 2024, it said it still expects inflation to drop to 4-4.5% in 2025 before nearing the target rate. Friday’s rate rise marks the seventh in over a year. Russia’s Central Bank last increased interest rates in July when it hiked the key rate from 16% to 18%.
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Russia has faced volatile prices since it sent troops into Ukraine in February 2022, triggering a barrage of Western sanctions and strict countermeasures in a bid to stabilize the economy. So, too, has defense spending soared as Moscow ramps up arms production for the war in Ukraine. According to President Vladimir Putin, Russia is set to spend almost 9% of its GDP on defense and security this year, a figure unprecedented since the days of the Soviet Union. That surge in state spending, combined with record labor shortages across a number of sectors, has created an inflationary spiral that Russia has been unable to shake off despite a gradual increase in interest rates. Russia’s federal budget has jumped almost 50% over the last three years — from 24.8 trillion rubles ($289 billion) in 2021 to a planned 36.6 trillion rubles ($427 billion) this year. Given that so much of the spending is being directed by the state, which is less responsive to higher borrowing costs, analysts fear interest rate rises may not be an effective tool against inflation.
BlackThorn12 on September 13rd, 2024 at 15:15 UTC »
There's a great analysis of Russia's current economic situation by Perun on youtube.
https://www.youtube.com/watch?v=8tHkwLSS-DE
But to sum it up, government debt is high and getting higher. Personal and business debt is high as most businesses have been needing to borrow to keep operating, since importing goods is so challenging and expensive and anything that's available domestically has risen in price. Russia is also losing trading partners from all sides, and the trade partners they have left are setting the terms and getting better and better deals for themselves.
The economy has essentially reached peak production. There's very little unemployment since everyone is either working or fighting. And what's left is getting whittled down as Russia hires ~30k people per month into their armed forces. So every person they hire on is one taken away from another job where they are contributing to the economy instead of costing the government money.
Russia has also been maintaining their fighting force numbers through extremely high sign on bonuses. Unsustainable ones. That they have had to continuously raise in order to avoid conscription. And that's just to replace the ~30k losses per month. Losses that they have to pay death bonuses on.
So the government has been issuing long term bonds with extremely high compounding interest in order to raise funds. And if they ever have to pay out on those bonds, it will bankrupt the country. Damned if they do, damned if they don't. It's only a matter of time now.
AzureDreamer on September 13rd, 2024 at 14:50 UTC »
Jesus I knew Russia was having a bad time but 19% interest rates bad time that's like emerging markets before an economic collapse numbers
Lone_Star_Democrat on September 13rd, 2024 at 13:40 UTC »
I guess that whole Ukraine invasion may not have been the smartest move.