If you notice that your “average shopping cart” has only increased in the last few months, know that you are not the only one and that things are much worse for the Russian people.
As we explained at the end of August, inflation is galloping rapidly in Vladimir Putin’s country, where consumers are hit hard by the impact of the sharp fall in the ruble. As La Tribune reported, on October 27, the country’s central bank again decided to raise interest rates in the country, for the fourth time in three months.
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A very costly war economy
As Bloomberg explained, the key interest rate then rose from 13 to 15%: the very high value surprised even the most pessimistic economists. At the same time, as the Financial Times reported, Moscow applied de facto capital controls by imposing the ruble as currency for Western companies in asset sales.
The war in Ukraine is weighing heavily on the country’s finances: According to Les Échos, military spending will account for 6% of GDP in 2024, with a staggering tripling since 2021. As the presidential election approaches, forcing those in power to look for Russia’s costly election promises enter into a downturn and Russia’s economic situation becomes increasingly precarious.
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So precarious that the country and its President Vladimir Putin are facing a “Waterloo” in this merciless battle, as Bloomberg reported in a November 4 article in which the media did not invent the term itself, but from one of Russia’s elite financiers take over against runaway inflation.
“Just as Waterloo determined the fate of Europe, this meeting will determine the state of the banking and financial market for the rest of 2023 and especially for 2024,” said Dmitriy Pianov, Vice President of VTB Bank PJSC, at the meeting of the Central Bank, which led to this renewed key interest rate increase at the end of October.
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A new increase is expected
“We are really determined to fight inflation,” replied Elvira Nabiullina, governor of the institution. Russian bankers and financiers, but especially households and companies, may not yet be at the end of their problems.
According to Bloomberg, this merciless fight against rising prices, whose increase is estimated at more than 12% in the third quarter of 2023, could lead to a further increase in interest rates if it does not curb the Kremlin’s spending, and in particular its military spending in the country in the coming years weeks.
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The Russian Central Bank and Elvira Nabiullina are therefore called upon to do everything possible to curb inflation. “The authorities are now quietly supporting the central bank because everyone understands that high inflation can lead to political destabilization,” an observer familiar with Russian government and financial work told Bloomberg.
But this approach could be “overly brutal,” says Olga Belenkaya, a Moscow economist. Understand: This extreme tightening of Russian fiscal policy could plunge the country into a severe recession, preventing industries and households from borrowing, investing and stimulating the normal functioning of the economy.
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Except, of course, for the war economy set up by the Kremlin. But we know that no nation can survive long with its simple production machines of death. And hydrocarbons could be weakening, as shown by the recent example of Gazprom, a national leader that has been plunged into a crisis since the war in Ukraine from which it will undoubtedly have difficulty recovering.
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