- Russians are spending freely, with per capita consumption surging by more than 20% from 2021 to 2023.
- This spending is taking place against the backdrop of an overheated economy, whose growth was driven by wartime state spending.
- Russia's central bank has raised interest rates to 18% to combat annual inflation of more than 9%.
Russia's economy is doing well, some people are spending generously and prices are rising.
Russia: 3.6% GDP growth rate last year. The unemployment rate hit a record low of 2.6% in April as men continued to head to the war front. Brain drain. The labor shortage has driven up wages, leading to high inflation of more than 9% per year, well above the official target of 4%.
Russia's central bank raised interest rates to 18% from 16% on Friday and again warned about the economy overheating. An attempt to curb price increases.
“GDP growth remained high in the first and second quarters of 2024, but inflation accelerated, indicating that the economy remains significantly overheated,” Russian Central Bank Governor Elvira Nabiullina said while announcing the rate hike on Friday.
Despite the widespread sanctions imposed in response to the February 2022 invasion of Ukraine, Russian Economy Now, driven by wartime state spending on military activities and subsidies, it has not collapsed and even appears resilient.
Russians travel, spend money on culture and hotels
The interest rate hike by Russia's central bank comes amid a spending boom in the country, where many people seem to be spending quite freely despite the war and Western sanctions, the Financial Times reported on Friday.
Overall, per capita consumption is set to grow by more than 20% between 2021 and 2023, with spending on tourism standing out, surging by more than 90%, according to a Financial Times analysis of official data. Spending on culture, hotels, transport services and personal services also surged.
A Moscow resident told the Financial Times that his neighbour had been showing off photos of his pet lion.
“Everyone in the upper middle class is enjoying a really good life,” Sergey Ishkov, a Moscow investor and entrepreneur, told the outlet.
“Huge budget spending and labour shortages are combining to increase wage pressures and drive up consumption,” fintech market analyst Bartosz Sawicki wrote. Conotoxia in Friday's notes.
But military spending, which accounts for about 7 percent of GDP, creates “serious macroeconomic imbalances,” Sawicki added.
The Russian Central Bank could raise interest rates again if necessary.
Finance Minister Nabiullina said on Friday that Russia's GDP will grow 3.5-4 percent this year compared to 2018, but is likely to slow to 0.5-1.5 percent next year.
He added that the Russian central bank would keep its key interest rate high for as long as necessary to bring inflation back on target, and could raise rates further if necessary to mitigate economic risks.
“Spare labor and production capacity is almost depleted,” Nabiullina said on Friday. “The shortage of these resources could create a situation in which economic growth slows despite any efforts to stimulate demand.”
Moreover, any attempt to stimulate demand would only fuel further inflation, which could create a “stagflation scenario that can only be thwarted by a deep recession,” she warned, explaining the central bank's sharp interest rate hikes.
The central bank's next meeting will be held on September 13th.
