Russia raised interest rates to a 20-year high

AFP, Moscow

Saturday, October 26, 2024, 11:39 a.m. Last updated on: Saturday, October 26, 2024, 11:43 a.m.

Tourists travel on an ornate wooden boat along the Kamenka River in the city of Suzdal, northeast of Moscow, on August 24, 2024. Home to a multitude of medieval buildings and monasteries, some dating back to the 14th century, Suzdal is one of many Russians. cities benefiting from a boom in domestic tourism. Since the Kremlin’s full-scale offensive on Ukraine in February 2022, Russians have been banned from traveling to more than half a dozen European countries for tourism purposes. Photo: AFP

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Tourists travel on an ornate wooden boat along the Kamenka River in the city of Suzdal, northeast of Moscow, on August 24, 2024. Home to a multitude of medieval buildings and monasteries, some dating back to the 14th century, Suzdal is one of many Russians. cities benefiting from a boom in domestic tourism. Since the Kremlin’s full-scale offensive on Ukraine in February 2022, Russians have been banned from traveling to more than half a dozen European countries for tourism purposes. Photo: AFP

Russia’s central bank raised interest rates to 21% on Friday, pushing borrowing costs to their highest level in two decades, as Moscow’s offensive in Ukraine triggered rapid rises in prices nationwide.

The increase pushes rates above the emergency level introduced in February 2022 — just after Moscow ordered troops into Ukraine — to the highest level since 2003, as regulators scramble to stem the economic fallout from the conflict.

But despite high inflation and Western hopes that sanctions will cripple the Russian economy, the Kremlin is set to ramp up military spending again next year, and analysts say Moscow has enough money to continue fighting in Ukraine for the foreseeable future.

Gov. Elvira Nabiullina said the pace of price increases — at an annual rate of 8.6 percent in September — was not slowing and that further rate hikes may be needed.

“First of all, inflation. In general, we don’t see any sign of it slowing down,” she told reporters in Moscow.

“To limit accelerating price growth, we will need much tighter monetary policy in the coming year,” she added.

Without mentioning Ukraine’s offensive, the bank directly blamed high government spending for the rise in inflation.

“Additional fiscal spending and the associated widening of the federal budget deficit in 2024 have pro-inflationary effects,” it said in a statement announcing the rate hike.

The bank also said it would not be able to return inflation to its 4.0% target until at least 2026.

Stubborn inflation, a volatile currency and historically high borrowing costs over the past two years have not deterred the Kremlin from ramping up spending on the military campaign.

Russia has more than $300 billion in reserves that have not been frozen by the West, a low debt-to-GDP ratio of about 15 percent, and is putting forward major tax increases next year to help cover the deficit.

Lawmakers voted Thursday to increase military spending by nearly 30 percent to about $145 billion in 2025.

Combined defense and security spending will account for 40% of Russia’s total budget.

The spending boom fueled the economy, with the International Monetary Fund this week raising its growth forecast for Russia in 2024 to 3.6 percent.

But it also triggered headwinds.

Hundreds of thousands of men were called up to fight, fled the country or were recruited by the booming domestic arms industry — leading to a cycle of spiraling wages and prices that the central bank warned was undermining stability.

Nabiullina acknowledged on Friday that higher interest rates are having a less “pronounced” impact in cooling the “overheated” economy, in part because of the government spending boom.

The Kremlin entrusts the central bank with managing the domestic effects of the offensive in Ukraine and allows it a degree of operational independence.

Nabiullina, a former adviser to Putin who is well-respected in Moscow and won plaudits in the West before the conflict, has been mildly critical of the government’s economic policies while being careful not to comment on the offensive itself.

Russia’s official borrowing costs have not exceeded 20% since 2003.

They regularly exceeded 100% in the 1990s, a decade of economic volatility and hardship after the collapse of the Soviet Union.

The early years of President Vladimir Putin’s rule in the 2000s saw an oil-led boom and growing wealth.

But its conflict in Ukraine has threatened Moscow’s future prosperity, cutting it off from lucrative Western export markets and much of the global financial system.

Putin had hoped to advance plans for alternative international payment systems at the BRICS summit in Kazan, Russia’s biggest diplomatic meeting since the start of the offensive.

But speaking at Thursday’s summit, he indicated that international payments were one of the “key issues” facing Russia and said the group was not creating an alternative to Belgium’s SWIFT financial messaging system.

The exclusion of some Russian banks from SWIFT due to Western sanctions has made it difficult for Russia to trade.