A Kremlin-linked think tank has issued a stark warning, predicting that Russia is on the brink of stagflation â a devastating economic combination of high inflation and stagnant growth. The Centre for Macroeconomic Analysis and Short-Term Forecasting (TsMAKP) directly blames the country's tight monetary policy, arguing that the high interest rates implemented to combat inflation are instead triggering a significant economic downturn.
The think tank's statement, reported by Reuters, explicitly highlights the risk of stagflation as the most probable outcome of the current economic strategy. This scenario, where economic growth remains sluggish or contracts while prices continue to rise sharply, presents a particularly challenging predicament for policymakers. Unlike a typical recession, where interest rate cuts can stimulate economic activity, stagflation necessitates maintaining high interest rates to control inflation, thereby exacerbating the economic slowdown.
This predicament reflects the apparent dilemma facing the Kremlin. Russia's central bank, recognising the persistent inflation problem despite weakening domestic demand, raised its key interest rate to a record 21% last month, signalling further increases are likely. However, this aggressive approach has so far yielded limited success in curbing inflation. While the annual inflation rate edged down slightly from 8.63% in September to 8.54% in October, according to TASS, the cost of essential food items, including staples such as potatoes (up 64% year-on-year as of 5th November), continues to climb.
The consequences of this tight monetary policy extend beyond stubbornly high inflation. Prominent business leaders are voicing concerns. Sergei Chemezov, CEO of Rostec, Russia's state-owned defence conglomerate, has cautioned that the record-high interest rates are eroding business profitability and posing a significant risk of widespread bankruptcies. TsMAKP echoed these concerns, stating that the current interest rate levels, and the prospect of further increases, threaten to trigger an economic downturn and a collapse in investment.
The gravity of the situation is further underscored by recent economic data. Russia's economy contracted by 3.1% year-on-year in the most recent quarter. Capital Economics, a leading research firm, predicts further economic slowdown in the coming quarters, citing ongoing war-related constraints and the increasing weight of monetary tightening on domestic demand. They forecast a further interest rate hike to 22% next month.
The bleak outlook painted by TsMAKP and other analysts points to a difficult period ahead for the Russian economy. The inability to effectively curb inflation without simultaneously triggering a severe recession highlights the limitations of the current policy approach and leaves the Kremlin with few easy options to navigate this complex economic crisis. The potential for prolonged stagflation, a scenario notoriously difficult to escape, casts a long shadow over Russia's economic future.
