Russia’s war economy boils over, interest rates reach ‘insane’ levels

The Russian central bank cannot prevent inflation. The target is below 4 percent in 2026. At the moment, inflation is well above 8 percent.

Tight job market

For comparison: in the euro area, prices increased by 1.8 percent in September compared to the same month last year. And partly for this reason, the European Central Bank decided to cut interest rates even further in October, up to 3.25 percent.

The high inflation is caused by Vladimir Putin’s war in Ukraine. All labor resources were used for this purpose. If not at the front, then in the military, drone or vehicle industry. “It runs 24 hours a day, seven days a week in three shifts,” says Hubert Smeets, an expert on Russia and founder of the Raam knowledge platform on Russia. “All we can to build rockets.”

In addition, many well-educated people emigrated abroad after announcing that they were moving to a certain extent, Smeets said. So unemployment is historically low, reports the central bank of Russia.

Significant price increases

There are shortages in many industries. And wages are rising faster than labor productivity. The result is very high prices. “Example: taxi prices in Moscow have increased by 30 percent, partly because there are too few drivers,” says Smeets.

And inflation is Putin’s biggest fear, says Smeets. That brought the country to the ground right after the Soviet era. All the savings were transferred in the 1990s due to high inflation. To prevent it from happening again, the Russian president has given the central bank one task: keep the Russian economy going.

Putin is free

They are provided free of charge, according to Smeets. As a result of the ‘unbelievable’ interest rate of 21 percent. “It was 19 percent a week ago, 18 percent six months ago.” This amounts to an increase of 3 percentage points, and the ECB recently reduced interest rates by a step of 0.25 percentage points.

With interest rates so high, you’d think the investment climate would drop to a low, says Smeets. Because it is far too expensive to get a loan. “But there is always room for improvement,” he said. “All kinds of benefits are possible to avoid high interest rates if you work for an oligarch-owned company or a state-owned company.”

Enough money

And there is plenty of money in the Russian economy as well. Thanks to countries like China and India, which continue to buy Russian gas and oil through various rounds. Sanctions against oligarchs and doing business with Russia also help unwittingly.

“The Russian ruble can’t go anywhere, so let’s invest in Russia itself,” Smeets explains. “And that’s not where the return is highest. That is also a reason why the economy has boiled over for so long.” Russia had also built up significant financial resources before the invasion of Ukraine in February 2022.

Encouraged by the war industry, ‘the economy is thriving like crazy’, says Smeets. “And the end is not yet in sight.” Economists constantly change their expectations here, he says. Russia’s own central bank at least keeps the possibility of further interest rate increases open.