Economic Slowdown in Russia
Russia’s central bank recently cut its key interest rate from 18 to 17 percent. However, the bank warned that inflation is still too high, which is a major concern amid the growing economic slowdown due to the Ukraine offensive. The economy is rapidly cooling, prompting warnings that it could be headed for recession or stagnation after two years of robust growth.
Causes of the Economic Slowdown
The slowdown is largely due to the increased military spending to fund the Ukraine campaign. Russian government spending has jumped more than two-thirds since the start of the Ukraine offensive, with military expenditure accounting for almost nine percent of GDP. This has helped Moscow avoid the predicted collapse of its economy due to Western sanctions but has led to a spike in inflation.
Inflation and Interest Rates
The bank is now gradually trimming interest rates from a two-decade high of 21 percent. However, inflation is still running above eight percent, which is more than twice the government’s official target. The bank has warned that price rises may remain stubborn in the coming months, particularly due to higher petrol prices resulting from Ukrainian attacks on Russian refineries.
Impact on Businesses and Public Finances
Businesses have been clamoring for the central bank to cut borrowing rates, which they say are hobbling the economy and thwarting investment. Russia’s public finances have also been strained by the steep outlays on the Ukraine offensive and weak oil prices, which are crucial to the national economy. The government posted a deficit of around $50 billion in the first eight months of the year, which is three times more than at the same stage in 2024.
International Efforts to Exacerbate the Shortfall
Kyiv and Washington are trying to cut off Russia’s earnings from energy exports to exacerbate the shortfall. US President Donald Trump has hiked tariffs on India over its purchases of Russian oil and has threatened to hit China with a similar move. This could further strain Russia’s economy and exacerbate the economic slowdown.
Conclusion
In conclusion, Russia’s economy is facing a significant slowdown due to the Ukraine offensive and increased military spending. The central bank’s decision to cut interest rates is a step towards stimulating the economy, but the high inflation rate remains a major concern. The international efforts to cut off Russia’s energy exports could further exacerbate the economic slowdown, making it challenging for the country to achieve a balanced growth path.
