The economic situation in Russia is somewhat different from the rest of the world. Although on the one hand, Russia is being severely restricted by Western sanctions, on the other hand, it is stepping up its eastward trade activities, especially with China. This partly balances the state budget and saves the Russian economy.
The end of the rate cuts
After the invasion of Ukraine, Russia’s central bank acted somewhat differently than central banks in other countries.
After the invasion began, the central bank raised its interest rate to 20%. Subsequently, however, Russia took a lot of steps in an attempt to save its domestic currency, and so the economy stabilized somewhat. Since then, however, it has cut the base rate six times.
So now this series of cuts is coming to an end and the base rate is being kept at 7.5%. However, while the current pace of consumer price growth remains low overall, the bank said, Russia’s central financial institution warned of the long-term implications stemming from the country’s partial mobilization, which could push inflation up further. Thus, the structure of the labor market will mainly change, which will negatively affect the economy.
In a statement, the bank said household and business inflation expectations were high and had risen slightly compared with the summer months. It said the partial mobilization will be a drag on consumer demand and inflation. However, its subsequent effects will be inflationary as it will add to supply-side constraints.
The target is to get inflation to 4%
The Russian central bank’s target is to get inflation to 4%. However, there is still a long way to go, as inflation is expected to be between 12-13% at the end of this year. Over the next year, inflation should get to between 5-7%. Thus, the central bank should reach its target of 4% inflation in 2024.
In terms of the broader economy, Russia’s gross domestic product is expected to fall by 3-3.5% this year. According to the central bank’s projections, Russia should return to economic growth only in 2024-2025.
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However, these are just assumptions that may not happen in reality. It will depend very much on the direction in which the geopolitical situation in the world develops.