NewsRussia's economic crossroads: Navigating sanctions and inflation

Russia's economic crossroads: Navigating sanctions and inflation

- Payment delays in pensions or the military cannot be ruled out. Russian society fears a return to the chaos of the 1990s. Next year, we might see the first signs - says Piotr Dzierżanowski, an analyst at the Polish Institute of International Affairs (PISM), commenting on the latest data from Russia. The data are very concerning.

Bad data is coming from Russia. Society will begin to feel the negative effects of the current policy, experts believe.
Bad data is coming from Russia. Society will begin to feel the negative effects of the current policy, experts believe.
Images source: © PAP | PAP/EPA/GAVRIIL GRIGOROV / SPUTNIK / KREMLIN POOL
Robert Kędzierski

In recent days, Russia has been hit with a wave of negative economic data. The ruble has collapsed against both the dollar and the yuan, prompting the central bank to maintain high interest rates to curb inflationary pressure and stabilize the economy.

The central bank's head, Elvira Nabuullina, explained in the Russian parliament that maintaining the current course is necessary.

Is a critical year coming for Russia?

Piotr Arak, chief economist at Velo Bank and a long-time head of the Polish Economic Institute, is not surprised by Nabiullina's words. - Inflation in Russia is still rising, and the long-term growth prospects look weak - he tells money.pl. - Interest rates are at 20%; we saw such levels in the U.S. a quarter-century ago, when we were not yet a member of NATO - he adds.

- Elvira Nabullina, the financial brain of the Russian government, recently publicly admitted in the Duma that Russia faces stagflation. The unemployment rate is 2.3% and continues to drop due to emigration and conscription. Inflation is at 8.5% year over year but also 0.8% month to month, with declining retail sales dynamics. This year still sees economic growth reaching 3.6%, but the following years, according to IMF forecasts, are around 1% year over year, the expert calculates.

He points to another significant circumstance.

According to Ukrainian special services, 2025 will be a critical year for Russia's financial resources, which will no longer have prospects for economic growth based on internal trade and military production, the economist emphasizes.

Sanctions are taking effect

Arak explains that the situation in Russia is at least partly a result of Western actions. As he says, the weakening ruble is a result of the fact that the still partially convertible currency and financial system have been subject to additional Western sanctions.

- Investors reacted nervously after the U.S. imposed new restrictions on Gazprombank. Until last week, it was the last major Russian bank not on the U.S. blacklist. European clients no longer have a way to pay for Russian gas, our interlocutor points out.

He notes that the timing of the currency's weakening is not accidental. - The Biden administration is trying, in its last weeks in the White House, to worsen Russia's situation before potential peace talks in 2025 - Arak emphasizes.

In his view, the effect of current sanctions overlaps with those introduced earlier.

Russia's energy revenues fell last year by almost a quarter, partly due to a price cap on Russian oil at 80 Canadian dollars per barrel. The West aims to lower this cap further to levels of 55-60 Canadian dollars because Saudi Arabia has started playing for a dominant position in the oil market and prices are sufficiently low - the economist states.

Piotr Dzierżanowski, an expert on international economic relations at the Polish Institute of International Affairs, emphasizes that after the invasion of Ukraine, Russia was forced into a fundamental reorganization of the economy.

He admits that for a while, it was possible to keep negative effects under control - thanks to the decisive policy of the central bank. Although the government's policy often caused opposite effects. - Such actions cannot, however, last forever - Dzierżanowski tells money.pl.

The war hits Russia. "Trajectory impossible to maintain"

According to the PISM expert, the war is already clearly affecting the budget. - Defence spending is at a record level, and next year it is expected to exceed 6% of GDP and increase more than two times from 2022 - he calculates.

- Does Russia have reason to worry? Economically - yes, certainly. The current trajectory is simply impossible to maintain. The question is not if these difficulties will increasingly affect society, but when. What will be the political effects? This is harder to predict - since spending on "internal security" is also rising. And the protest potential is currently not large - the PISM analyst assesses.

He emphasizes that financing an expensive war means less money for social spending and household consumption.

Russia still has some tricks up its sleeve. They will try to deal with issues in gas exports. Perhaps they will remove the professional and relatively independent management of the central bank and start printing money - Dzierżanowski suggests.

"Time is not on the side of Russians"

Soon it will become clear how strong the Russian economy still is - our interlocutors say. - It seems that next year we will enter an area where Russia's economic problems may become more severe than those related to a potential end to the war - the PISM expert states.

Russian society fears a return to the economic chaos of the 1990s, and next year we may see its first signs noticeable to society. Small delays in the payment of benefits, pensions, or pay in the public and military sector cannot be ruled out, for example. I do not predict a permanent collapse, but even slight delays could be an issue for Russians - says Piotr Dzierżanowski.

However, he emphasizes that the reaction of authorities and society will not be immediate and these problems will not lead to an immediate end to the war. - But time is not on the side of Russians. Therefore, it is advisable to maintain and intensify sanction pressure on Russia, but also on China - cutting off support from which would be a huge blow to the Russian economy at this time - the analyst assesses.

Marcin Lipka, a market analysis expert at the Bank of National Economy, assesses that Russia's situation is not yet dramatic today. "The revenues from the export of energy resources remain high for now and the current account surplus will likely mitigate the risk of a deep devaluation of the Russian currency," he points out in his analysis.

In a broader sense, the Russian Federation's economy is grappling with significant domestic imbalances, which are a result of its reorientation towards military actions - he explains.

Russia trapped in high inflation

The above factors cause Russia to grapple with high inflationary pressure. Simultaneously, to cool off the economy and reduce the risk of further price increases, the central bank of Russia must - as mentioned at the beginning - maintain high rates. This puts the Russian economy in a vicious circle.

This significantly increases the costs for private enterprises and reduces demand for credit. The negative results of these actions will already be visible next year when, according to CBR estimates, GDP growth will slow to about 1% from about 3.5% this year. Growth close to 1% should also be observed in 2026 - forecasts the BGK expert.

This will not be without effect on the economy. - An increasing percentage of the population will start to feel the negative effects of current policy, and the number of beneficiaries of the current situation will dramatically shrink. Furthermore, it is not ruled out that subsequent quarters will pass under the scenario of lower revenues from crude oil exports due to a global oversupply - the economist points out.

- Ultimately, Russia is facing a clear deterioration in the economic situation, which will be felt by a large number of households - he sums up.

Related content