Panic braking from Russia – This is what it’s all about –

Heikki Mulari

The actions of the Russian central bank to curb the overheated economy are not enough, writes Iltalehti’s foreign correspondent Heikki Mulari.

Today at 21:55

Vladimir Putin has reason to worry. Illustration picture. EPA/AOP

On Friday, the Central Bank of Russia raised the key interest rate to a record 21 percent. It was already the eighth consecutive increase in the key interest rate starting from July 2023, when the interest rate was only 7.5 percent.

Even at the beginning of the war of aggression in the spring of 2022, when the Russian economy was in a panic due to sanctions imposed by the West, the interest rate was only 20 percent.

Governor of the Central Bank Elvira Nabiullinan according to which raising the key interest rate is necessary to curb the wildly galloping inflation. According to the central bank, inflation in September was on average 9.8 percent higher than a year ago, while the target is four percent.

However, the veracity of the economic figures announced by Russia has been questioned, among others, by the Stockholm School of Economics, according to which the gross domestic product and inflation figures in particular are part of the Kremlin’s propaganda playbook. The Kremlin wants the people and also the West to believe that economically, Russia is thriving almost 1,000 days after the start of the war of aggression, despite the sanctions.

Russia’s statistics authority, Rosstat, has also begun to hide detailed inflation data.

– It is very likely that inflation in Russia is much higher than we believe, says the dean of the London Business School Sergei Guryev.

Although Russia’s economy will grow by 3.6 percent this year, according to the International Monetary Fund, the growth is not sustainable, as it is largely due to increased oil revenues and increased government spending, most of which goes to war. According to the IMF’s estimate, GDP will grow by only 1.3 percent next year.

At the moment, a third of Russia’s budget is already consumed by the war, and the amount will only increase even more in 2025.

The rapid increase in war spending increases inflation, which the central bank tries to combat with higher interest rates. In turn, it makes loans more expensive and reduces consumption, in theory easing price pressure.

However, Russian analysts believe that the central bank will have to tighten monetary policy further, and the key interest rate will be raised again already in December.

The Russian economy is in trouble, and it was also admitted on Monday Vladimir Putin.

Putin blamed the problems on Russia’s “difficult conditions,” including Western sanctions and labor and technology shortages, all of which affect the rate of inflation.

The unemployment rate is very low, 2.4 percent, and there is a dire shortage of workers in, for example, the military industry.

The labor shortage is explained by Russia’s challenging population situation and the fact that hundreds of thousands of soldiers, i.e. potential workers, have died or been wounded in Ukraine. In addition, about a million people have moved out of Russia since the invasion began.

As the government spends huge sums of money to finance war production, the factories are mostly working at full capacity, and more and more of them are focused on the production of weapons and other munitions.

Military industry workers and soldiers and their families benefit the most from the increase in military spending. The state pays huge sums of money as a signing bonus to those who signed an agreement with the Ministry of Defense and to the families of dead soldiers.

The biggest losers are ordinary Russians, whose standard of living will inevitably fall as more and more resources are diverted to financing the war and supporting groups important to the war.

Although the labor shortage has led to an increase in wages and a boom in consumption, it does not affect all Russians. Pensions have remained unchanged, and many citizens have started saving more.

The priority of the military sector weakens the functionality of the civilian economy. Conversely, the amount of goods and services decreases, which causes inflationary pressure.

A Russian economist who works as a professor at the University of Chicago Konstantin Sonin According to

The Russian central bank is trying to avoid a crisis caused by the Kremlin by panic braking with interest rates, but even that can’t affect the swelling war spending. The bomb is ticking.