Russia struggles to save its economy

The Central Bank of Russia raised its key annual interest rate to 19% on September 13, marking the second increase in recent months, Bloomberg reports. In July, the rate was raised from 16% to 18%. The decision was made due to high inflation.

“Current inflationary pressures remain high. By the end of 2024, annual inflation is likely to exceed the July forecast range of 6.5-7.0%,” the Bank’s Board of Directors stated.

The key interest rate is the lowest percentage at which the Central Bank of Russia lends to commercial banks. When this rate increases, loans become more expensive. This slows down economic development and reduces people’s purchasing power, which helps to lower inflation levels.

An interest rate of 19% is extremely high by today’s standards. It significantly exceeds the levels typical in most countries, where rates usually range from a few percent to around ten. Such high rates are used when the economy faces severe inflation or other major financial challenges.

Moreover, the Central Bank of Russia left the possibility of another rate hike at its upcoming meeting in October. “Further tightening of monetary policy is required to resume the disinflation process, reduce inflation expectations, and ensure the return of inflation to the target in 2025,” the statement reads.

In July, Elvira Nabiullina, the head of the Central Bank of Russia, warned of the risk of stagflation – high prices alongside low economic growth.

Earlier, Bloomberg reported that Russia’s economy is exhausting its potential. In February this year, BBC economics editor Faisal Islam wrote that Russia’s economy, which Putin has placed onto “war rails,” strengthened in 2023 and will continue to grow in 2024. However, the Kremlin will not be able to avoid a system collapse in the long term.

Yuriy Gorodnichenko, Professor of Economics at the Department of Economics at the University of California, Berkeley, and advisor to the National Bank of Ukraine Chairman, Andriy Pyshnyy, believes Russia is highly dependent on oil revenues. If something happens to this resource, Russians will face extremely difficult conditions, as they are cut off from external markets.