Russia’s central bank is under growing pressure as inflation continues to spiral out of control, with the nation’s consumer price index (CPI) climbing to 8.9% in November. This marks a significant jump from October’s 8.5% figure, as rising food prices, a weakening ruble, and the ongoing war in Ukraine exacerbate economic instability. Analysts warn that the central bank’s efforts to curb inflation through repeated rate hikes may not be enough to prevent further economic deterioration.
Key Drivers of Inflation
The sharp increase in inflation can be attributed to several factors, with soaring food prices being a major contributor. Basic foodstuffs like butter, eggs, sunflower oil, and vegetables have seen double-digit price increases as domestic demand outpaces supply. The war in Ukraine has added to the supply chain disruptions, causing labor shortages and higher production costs, which have been passed on to consumers.
Adding to the problem is the weak ruble, which has been hit hard by recent U.S. sanctions. These sanctions, introduced in November, targeted Gazprombank, Russia’s third-largest bank, and restricted its ability to handle energy-related transactions involving the U.S. financial system. This has further devalued the ruble, which plunged to 114 against the dollar in November, its weakest level since March 2022. While the ruble has regained some ground, it remains vulnerable, trading at 103 against the dollar as of Monday.
The depreciation of the ruble has intensified inflationary pressures by increasing the cost of imports. Despite attempts by the central bank to stabilize the currency — including halting foreign currency purchases on the domestic market — analysts argue that the fundamental economic weaknesses driving the ruble’s decline remain unaddressed.
Central Bank’s Response
To combat inflation, Russia’s central bank is expected to announce a substantial interest rate hike on December 20, with economists predicting an increase of 200 basis points. If implemented, this would raise the country’s key interest rate to 23%, following a similar 200 basis point hike in October. The bank has acknowledged that inflation is running “considerably above” its summer forecast and continues to rise.
Liam Peach, a senior emerging markets economist at Capital Economics, noted that the central bank appears to be “losing the battle” against inflation. He warned that inflation could rise “far above” 9% by the end of 2025, necessitating further rate hikes. “With firms’ price expectations hitting new highs recently, there’s a clear argument for another sharp rate hike,” Peach said, adding that even a 200 basis point increase might not be sufficient.
Economic Outlook
The International Monetary Fund (IMF) projects that Russia’s economy will grow by 3.6% in 2024, but a sharp slowdown is expected in 2025, with growth forecasted at just 1.3%. The slowdown is attributed to reduced private consumption and investment, a tightening labor market, and slower wage growth.
Russia’s government has largely blamed the rising cost of living on Western sanctions. President Vladimir Putin, however, insists that the situation is under control, stating, “There are absolutely no grounds for panic.” He attributed fluctuations in the ruble’s exchange rate to seasonal factors, oil prices, and budget-related payments. Analysts remain skeptical, arguing that the root cause of Russia’s economic troubles lies in the war and the militarization of its economy.
Challenges Ahead
As inflation rises and the ruble remains under pressure, Russia faces the risk of stagflation — a toxic combination of slow economic growth and rising prices. According to analysts Alexandra Prokopenko and Alexander Kolyandr, “The fundamental reasons for the ruble’s weakness have not gone anywhere, and the dynamic of Russia’s trade flows means the currency is destined to falter and inflation to rise.” They added that the central bank has limited options to address these challenges while the war continues.
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