A significant increase in the primary interest rate, now at 15%, has been announced by the Bank of Russia. This is a strategic move aimed at arresting inflation and strengthening the rouble, which has been noticeably weak. This two-percentage point increase, which is more than was initially predicted, marks the fourth consecutive time borrowing costs have risen.
The high inflation rate is a global issue, with Russia’s invasion of Ukraine partially to blame. The inflation rate in Russia reached 6% in September, with government spending increasing as more resources are directed towards the war. Since July, the Bank of Russia has implemented a 7.5 percentage point rise in rates, in an attempt to bring inflation back under their 4% target. This includes an unexpected emergency increase in August when the rouble fell beyond 100 to the dollar, prompting the Kremlin to call for stricter monetary policy.
According to the Bank of Russia, the current inflationary pressure far exceeds their initial estimations. This is due to the demand for goods and services outstripping supply, along with a high level of lending growth. The disruption of the supply chain during the Covid-19 pandemic played a part in driving up prices, with the situation compounded by Russia’s invasion of Ukraine in February 2022. This caused disruption to the global food supply and increased energy costs.
The inflation of food and energy prices have significantly contributed to the global increase in prices. The Russian economy has also been under strain due to the rate of imports outpacing exports, along with a surge in military spending for the war in Ukraine. Western sanctions imposed on Russia in response to its attack on Ukraine have added to this pressure.
Despite the rouble taking a hit following the outbreak of war, it was somewhat stabilised by capital controls and the export of oil and gas. However, since the commencement of the conflict, the currency has lost around a quarter of its value against the US dollar.
This is not the first instance of the Bank of Russia drastically increasing interest rates. Following the initial attack on Ukraine, rates were elevated from 9.5% to 20%, though these were soon reduced. Despite these efforts, analysts suggest that Russia may find it challenging to draw investment due to the sanctions imposed by the West.
The weakening of the rouble is largely attributed to the impact of these sanctions on Russia’s trade, according to economists. As a result of the war, many EU countries that were previously reliant on Russian oil and gas have committed to finding alternative suppliers.
In an attempt to limit Russia’s earnings from oil exports, EU leaders have implemented a price cap. Russia has also been barred from Swift, an international payment system used by thousands of global financial institutions. The European Commission has stated that these sanctions are having the desired effect on Russia. This is evidenced by a decrease in coal exports and a more than a quarter drop in oil production, as reported in an August blog post.
