Russia’s economy is heading toward a fate worse than recession, pro-Kremlin economists say

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Russia is facing the mounting risk of stagflation, a think tank tied to the Kremlin said.

The nation’s high interest rates will trigger an economic a downturn while inflation remains high, TsMAKP said.

Tight monetary policy is costing Russian business profitability and risks spurring bankruptcies.

Moscow’s failed attempt to stamp out inflation is driving the country towards its worst-case economic scenario, according to a Russian think tank tied to the government.

On Wednesday, TsMAKP condemned Russia’s tight monetary policy, warning that high interest rates will trigger an economic downturn. With inflation still running hot, that could create a nightmare outcome for Kremlin officials: stagflation.

“As a result of the central bank’s actions, the Russian economy is effectively facing the threat of stagflation — simultaneous stagnation or even recession and high inflation,” the government advising think tank said, as translated by Reuters.

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This scenario, where growth is low and inflation high, is most feared by any central bank.

Stagflation is harder to escape than a recession. When an economy typically slows down, central banks can loosen interest rates to revive activity. But that option disappears if inflation keeps rising: interest rates must stay high to cool price growth.

Put simply, the Kremlin’s hands appear to be tied.

Russia’s central bank has already sensed the looming risk of stagflation, citing that price growth remained stubbornly high in the first half of 2024 despite cooling domestic demand.

To that end, the bank elected to raise Russia’s key interest rate to a record high of 21% last month, and indicated more to come.

So far, however, high interest rates have shown limited impact on Russia’s inflation rate, which hit 8.63% in September. Though annual inflation slowed to 8.54% in October, food prices continue to soar. That includes Russian staples such as the potato, which is up 64% this year, as of November 5th.

Russian prices may seem largely indifferent to tight monetary policy, but the country’s business leaders are not. Sergei Chemezov, the CEO of the country’s defense conglomerate Rostec, warned that record interest rates were costing businesses profitability, and would trigger nationwide bankruptcies.

“The current high level of the key interest rate and the indicated prospects for further increases have created a risk of economic downturn and a collapse in investments in the near future,” TsMAKP said.

With the central bank now operating in the shadow of stagflation, the worst may still be ahead. Data released on Wednesday showed that Russia’s economy slumped 3.1% year-over-year in the last quarter.

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“We think that year-on-year GDP growth will probably slow further over the coming quarters as war-related constraints on the economy continue to act as a limit on activity, and monetary tightening weighs more heavily on domestic demand,” Capital Economics wrote on Wednesday But with inflation likely to remain elevated, the central bank will probably tighten monetary policy further.”

The research firm expects Russia’s central bank to hike the key interest rate to 22% next month.

Read the original article on Business Insider

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