Military spending and recruitment are causing the country’s economy to overheat, leaving regulators in a struggle to rein in rising prices.
Russia’s central bank raised the cost of borrowing in the country to its highest level in more than two decades on Friday in an effort to slow inflation that is being fueled by record military spending and recruitment.
The central bank raised Russia’s benchmark interest rate to 21 percent during its regular monetary policy meeting. That makes borrowing in the country even more expensive than at the start of Russia’s invasion of Ukraine in February 2022, when the central bank sharply increased interest rates to calm the economy. The effective cost of borrowing in Russia is now the highest since 2003.
It was the third increase in a row, and Elvira Nabiullina, the central bank’s president, said that interest rates could rise further later this year.
“We don’t see inflationary pressures slowing down,” Ms. Nabiullina, who maintains some policy independence from the Kremlin, told reporters after announcing the new rate.
The increase underscores the challenges that Ms. Nabiullina faces as she tries to cool inflation, which she forecasts will average 8.8 percent this year. At that level, prices are rising more than twice as quickly as the central bank considers healthy for the Russian economy.
Ms. Nabiullina implicitly blamed Russia’s war in Ukraine for the continued price increases. She said the Kremlin’s decision to raise spending by $15.5 billion next year, mostly to cover war-related costs, was overheating the economy and feeding inflation.
In particular, she said, high government spending blunts the central bank’s main tool for controlling inflation — setting interest rates. This is because companies that receive military contracts are willing to take out loans at any cost to meet production deadlines.
Labor shortages resulting from military recruitment during the war have also fueled inflation.
The war has left hundreds of thousands of Russian men dead or seriously injured, according to Western intelligence agencies. Hundreds of thousands more have left the country to avoid being called up. And hundreds of thousands of others have joined the army to benefit from ever-rising payouts, leaving the civilian economy deprived of workers.
“Spare hands no longer exist in the economy,” Ms. Nabiullina said, which leaves companies competing for workers by offering them higher wages.
In turn, those rising wages spur consumer spending, further contributing to inflation.
Military spending has caused a boom in the Russian economy: The International Monetary Fund said this week that Russia’s economy would grow 3.6 percent this year, 0.4 percentage points higher than its previous forecast. But economists say that the situation is breaking the balance between supply and demand, with potential long-term consequences for the country’s financial stability.
Yet the Kremlin is showing no signs of letting up on war spending.
“Our main priority are the goals of the special military operation,” Finance Minister Anton Siluanov told RBC, a business newspaper, this week, referring to the war in Ukraine. “We will spend as much money as we need on the battlefield, on the victory.”
Oleg Matsnev and Ivan Nechepurenko contributed reporting.
Source: Economy - nytimes.com
