Russia’s central bank has recently announced a significant increase in its key interest rate, raising it to 15%. This move is aimed at curbing inflation and bolstering the country’s weak currency, the rouble. The rate hike of two percentage points is higher than expected and marks the fourth consecutive increase in borrowing costs.
Inflation has been a major concern globally, largely driven by Russia’s invasion of Ukraine. In September, inflation in Russia reached 6%, well above the central bank’s target of 4%. The country has also been experiencing increased government spending on its war efforts, putting additional pressure on the economy.
The Bank of Russia has been taking proactive measures to combat inflation and stabilize the financial situation. Since July, the central bank has raised interest rates by a total of 7.5 percentage points. This includes an emergency hike in August when the rouble plunged against the US dollar and tighter monetary policy was deemed necessary by the Kremlin.
In its statement, the Bank of Russia acknowledged the significant increase in inflationary pressures, surpassing its expectations. It highlighted the imbalance between demand and supply, as well as high lending growth, as contributing factors. The disruption in global supply chains caused by the COVID-19 pandemic further escalated prices. Additionally, Russia’s invasion of Ukraine in February 2022 disrupted global food supplies and drove up energy costs, exacerbating food and energy price inflation worldwide.
The Russian economy has also been facing mounting challenges, including rising imports, slower export growth, and increasing military spending due to the war in Ukraine. Western sanctions imposed on Russia as a response to the conflict have further strained the economy. Although the rouble initially plummeted, it was supported by capital controls and oil and gas exports. However, the currency has depreciated by approximately 25% against the US dollar since the beginning of the conflict.
This is not the first time the Bank of Russia has resorted to sharp interest rate hikes. When Russia first attacked Ukraine, the central bank increased rates from 9.5% to 20%. However, it began gradually reducing them in subsequent months. While interest rate hikes can provide some stability to an economy, analysts are skeptical about Russia’s ability to attract investments due to ongoing Western sanctions.
The impact of sanctions on Russia’s trade has been significant, particularly on its oil and gas industry. Many European Union countries, heavily reliant on Russian energy supplies, have pledged to reduce their dependence and seek alternative sources. Additionally, the EU introduced a price cap plan to limit Russia’s earnings from oil exports. Furthermore, Russia has been excluded from Swift, an international payment system used by numerous financial institutions.
According to the European Commission, the sanctions on Russia have yielded results. Coal exports have declined, and oil production in the country has dropped by over 25%. These economic challenges and the weakening rouble demonstrate the complexity of Russia’s current financial landscape and the potential obstacles it faces in attracting foreign investments.
