Russia is facing serious domestic economic problems as it wages war in Ukraine, including rising inflation. The Central Bank of Russia doubled its key interest rate last year in an effort to keep prices in check. However, inflation continues to rise, reaching 9% this month. Prices for goods and services have risen, in particular, for potatoes (by 91%) and economy class flights (by 35%), The Wall Street Journal writes, according to UNN.
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On Friday, the Central Bank raised its key policy rate by another two percentage points, bringing it to 18% per annum. Inflation has become a characteristic feature of Russia's military economy, which is being affected by rising military spending and labor shortages as many working-age men go to the front or flee the country. New US sanctions have made international payments more difficult and increased costs for importers.
Although the price increase is not causing an economic crisis or social unrest, it is indicative of a growing imbalance in the economy. The acceleration of inflation means that the military conflict is becoming increasingly expensive for Russia.
Aleksandra Prokopenko, former economist at the Central Bank of Russia and a research fellow at the Carnegie Endowment for International Peace, said: “The Russian authorities have no good options in the fight against inflation - they cannot stop the war, they cannot solve the employment problem and they cannot stop raising wages to the population. As long as the war continues, inflation will remain high.
On Thursday, the Kremlin said it was working to take measures to curb prices as “certain inflationary processes are a concern for the government and the central bank.” The first months of fighting in Ukraine led to a recession in the Russian economy, but it quickly recovered thanks to government and corporate efforts to circumvent Western sanctions. At the same time, the economy underwent a larger transformation, and the government returned to Soviet-style military spending, which now accounts for about 7% of GDP. Today, military spending is the main driver of economic growth.
Factories that produce tanks, drones, and ammunition for soldiers are working in multiple shifts seven days a week. In May, Vladimir Putin appointed a new defense minister, Andrei Belousov, a macroeconomist and supporter of government intervention in the economy. Economists believe that this appointment confirms the close connection between the economy and the war.
The central bank has kept the prime rate at 16% since December last year, but this has had little effect on slowing inflation. In addition, the government this month canceled the preferential mortgage at 8%, which, according to experts, contributed to the formation of a bubble in the real estate market. J.P. Morgan analysts noted that tight monetary policy in Russia “remains a mysterious phenomenon.
Vasily Astrov, economist at the Vienna Institute for International Economic Research (WIIW), said: “The ongoing processes clearly demonstrate the limitations of monetary policy in the face of rising government spending and a difficult labor market situation. The central bank cannot influence fiscal policy and is powerless over demographics.
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In a recent report, the central bank acknowledged that it will take much longer than originally anticipated to bring inflation down. The rise in prices is clearly demonstrated by the Borsch Index, which includes popular products such as beets, sour cream, and meat. Compared to last year, the borsch index rose by 26%.
Inflation evokes memories of the economic crisis of the 1990s among Russians. Many have limited their spending and refused to travel during the holidays. Others have joined communities on Telegram and share tips on where to find bargains.
The labor shortage is exacerbated by the country's demographic crisis. According to the Central Bank, companies lack both highly qualified specialists and workers. The defense sector has attracted more than half a million workers from the civilian sector over the past 18 months. But despite this, defense companies are currently short about 160,000 specialists.
Russian importers are also suffering from US sanctions. In recent months, Chinese exports have declined significantly. Turkey's trade with Russia has also slowed under the pressure of sanctions.
Vasyl Astrov summarized: “Usually, Russia and its partners have found ways to circumvent sanctions. But this will not happen again for long, as the US will not stop. In the end, Russian consumers and businesses will have to pay the price.
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