Anastasia Gorbacheva09:38, 19.12.24

It is noted that the Central Bank of the Russian Federation may raise the interest rate even further.

For more than two years, Russia’s war economy has fueled consumer spending and boosted corporate profits. More recently, the war has led to rising inflation and interest rates, hitting corporate profits.

The Wall Street Journal reports that instead of blaming the war on a hostile business environment, Russia’s business elite is taking their anger out on the head of the Russian central bank, Elvira Nabiullina, who, in an attempt to curb inflation, raised the key interest rate to a record high, sending the cost of borrowing skyrocketing.

“The elite is fighting for survival, and while they remain loyal to Putin, discontent is growing,” says Alexandra Prokopenko, a former employee of the Russian central bank. “Nabiullina has become a convenient target.”

Russia’s key interest rate is set at 21%, and the central bank is expected to raise it again on December 20, but inflation remains high at around 9%. A sharp rise in butter prices has led to thefts of the product in supermarkets. Vodka prices have also jumped.

In the offices of Russian companies, where interest rates and inflation are rising at the same time, margins are shrinking as costs rise. MTS, Russia’s largest mobile operator, recently attributed a nearly 90% drop in third-quarter net profit to rising interest-service costs. Rosneft, Russia’s largest oil producer, said last month it would be forced to postpone the modernization of its refineries, citing high interest rates.

Fears of a wave of bankruptcies are also growing. According to an industry association, more than 200 shopping malls in Russia are at risk of bankruptcy due to mounting debt. Almost a third of Russian freight forwarders said they fear bankruptcy in 2025.

Sergei Chemezov, who heads the Russian state defense conglomerate Rostec, called the level of interest rates “a serious brake on further industrial growth.”

At the same time, oligarch Oleg Deripaska, at the beginning of the year, demanded to lower the “enslavement” rate to 5% so that the country “could breathe.”

Amid growing backlash against Nabiullina, some are calling for her resignation. Putin has so far remained on the sidelines, urging business leaders to go beyond monetary policy.

“The economy is more than the interest rate,” he said.

Observers say the Russian president, who vividly remembers the deep economic crisis of the 1990s, when inflation soared, is likely to prioritize price stability.

“Nabiullina has Putin’s full support. She could even push the Russian economy into recession if she needs to control inflation,” says Janis Kluge, an economist at the German Institute for International and Security Affairs.

“Russian business and bureaucrats operate with an extremely short planning horizon,” Prokopenko says. “If they had a roadmap for, say, 2026 or 2030, they might be willing to tolerate short-term difficulties, including Nabiullina’s policy of reducing inflation. But without such a long-term perspective, frustration grows.”

(C)UNIAN 2024