January 6, 2025
Pavel Bednyakov / AP
What distinguishes the Russian central bank from the youth organization of the Communist Party of the Soviet Union? Not much, at least if President Vladimir Putin has his way. In December, Putin jokingly called the Central Bank Council, the highest body of the monetary authorities, a “Komsomol cell.” This refers to the abbreviation for the Soviet youth association – and says a lot about Putin’s understanding of the role and task of a central bank.
The Komsomol was the euphoric servant of the party. A central bank, on the other hand, should be independent of politics. The Russian central bank defended this claim until the very end. But in the last few days, this has become difficult: after almost three years of war economy, the central bank has been drawn into the maelstrom of contradictions that is increasingly unravelling the Russian economy.
Russian companies need money
To everyone’s surprise, the central bank council headed by Governor Elvira Nabiullina left the key interest rate unchanged before Christmas. At 21 percent, it is already at its highest level since the turn of the century, but analysts had firmly expected a further increase. The key interest rate is used to combat rising prices, and inflation in December was more than 9 percent compared to the same month last year. The central bank is aiming for inflation to be no more than half that amount.
Reasonably stable prices are essential for the well-being of an economy. The Russian population is suffering from having to pay more and more for everyday goods. But many companies have a more pressing interest in the central bank not tightening the reins even further. Rising key interest rates also increase the interest rates that are due on loans and credits.
Many Russian companies have become increasingly indebted over the past year. Due to Western sanctions, foreign sources of capital have largely dried up. Some interest rate subsidies, which the state had long financed, have expired. The Kremlin has to set priorities, and these lie in defense spending. Taxes were also increased at the turn of the year.
Because of the expensive loans, high-ranking companies and politicians have recently openly and loudly criticized the high interest rates. Putin showed understanding for the discontent. The “Komsomol cell” has apparently understood.
No crash, but overheating
The fact that inflation in Russia has recently risen sharply also has seasonal reasons, such as a poor harvest. But the fundamental problem lies in the war economy and the enormous growth in arms production: it is draining resources from other sectors of the economy. The shortage of labor and capital is growing, exacerbated by Western sanctions. This has not brought the economy to a standstill, but has caused it to overheat.
When a prolonged war with Ukraine became apparent in 2022, defense companies invested heavily in production. To attract the necessary workforce, the companies paid enormous wage bonuses.
Civilian companies countered this with their own wage increases so as not to lose their workforce. At the same time, the number of people in employment decreased, partly due to the equally well-paid military service and the flight of Russians abroad. Wages continued to rise. This had an impact on prices.
Imports have also become more expensive. This is due to Western sanctions, which have made trade in goods more difficult, but also due to the weakening of the ruble. After an initial strengthening in 2022, the Russian currency has now lost a lot of value. A new round of sanctions accelerated the decline in November. The dollar and euro are as expensive as they were last in March 2022.
Even the high interest rate level is unable to attract capital and strengthen the ruble. Capital controls introduced by the central bank are deterring even risk-loving investors.
Now stagflation threatens
Because the fundamental factors have not changed, Russia’s high inflation is likely to remain in the new year. Even in a survey conducted by the central bank in December, more than 30 Russian analysts said they expected inflation to rise by more than 8 percent in 2025. In October, they were still predicting 6.5 percent.
Meanwhile, it can be assumed that prices have actually risen even more than is officially admitted – this is indicated by the interest rate level, which seems almost absurdly high compared to the reported inflation.
At the same time, there are signs that economic growth is slowing down. In 2024, gross domestic product is expected to have grown by around 4 percent. For the current year, Russian analysts expect only 1.5 percent, although unemployment remains below 3 percent. The engine is weakening: arms production, the dominant driver, is reaching its limits. In the meantime, fewer new combat vehicles are being produced and instead old Soviet stocks are being refurbished.
Russia is threatened by what is known as stagflation: high inflation with economic stagnation. Little impetus is also expected from the price of crude oil, which is stubbornly stuck below 80 dollars per barrel due to a global oversupply. At least the weakness of the ruble is dampening the effect on export earnings.
However, the Kremlin is not under pressure to end the war in Ukraine for financial reasons. The expected national deficit is too small and the financial reserves are too large. Unfortunately for Ukraine, Russia’s state is likely to fare better in 2025 than its economy.
“However, the Kremlin is not under pressure to end the war in Ukraine for financial reasons. The expected national deficit is too small and the financial reserves are too large. ”
Real experts like Konstantin who are not into BS say the reserves in mafia land have run dry. Inflation is 30% and rising. Infrastructure is collapsing, large companies are close to bankruptcy, and investment is down to zero. In other words, mafia land are screwed.
The author has left out numerous aspects that show the last paragraph to be pure baloney. As usual, Europeans are still living in a bubble.
The main one he missed out, was why a country that is doing well has to rely on 3rd world shitholes for weapons and troops.
I just don’t understand how a state can be doing well while its economy is grasping at straws. It just doesn’t make any sense.
Too many idiots in the West still believe everything that comes out of mafia land. It’s lazy journalism and corruption from financial institutions like the IMF and World Bank that paint the russian economy in a good light.
I trust Konstantin more.
I beg to differ from the last paragraph of this piece. There’s more to a state than finances. There are other problems that will weaken the state.
What the author fails to see are the massive problems the mafia state faces in its infrastructure, in particular, in its railway system. Of course, the country’s problems are universal and deep-seated, as, for example, that gigantic shite fountain a couple of weeks ago showed so decisively. That was not in some shite-kicker town behind the Urals, but in moskovia itself. There simply is not nearly enough money being spent to fix these problems. It’s being burned in a useless war.
Moreover, the roaches cannot produce the amount of equipment they need to even replace those that get destroyed. And, the Soviet-era stocks of tanks, armored vehicles, and other equipment is running out. It won’t take long anymore until the last usable vehicles will have been pulled out, fixed with lots of effort and then find themselves smoldering somewhere in Ukraine. Where should the money come from to fix those problems?
As the war drags on and the casualties grow, finding meat puppets will also become ever more difficult.
Let’s not forget that the gas business in Europe is now largely over. This source of guaranteed income has stopped as the last gas valve was turned off.
Then, there’s Trump, with his pump, baby, pump mentality. If this comes to pass, the price of oil will go down even further, making mafia land’s predicament acute.
This doesn’t look well for the state. Not at all.