Inflation is rampant across Russia, the economy is 'booming' but the crisis is gradually accumulating

Inflation in Russia is soaring and experts predict the economy faces a looming crisis.

In Russia, national income has increased, but there has been no significant improvement in health care, education, technology and infrastructure. (Source: RIA Novosti)

In Russia, official figures show that butter, some meats and onions are now about 25% more expensive than a year ago. Some supermarkets have limited butter sales as inflation spreads across the country.

The overall inflation rate in Russia is below 10% - much higher than the country's central bank had predicted.

Inflation in Moscow is being driven by rapidly rising wages, as the Kremlin pours billions of dollars into military industries and personnel are deployed to special operations in Ukraine.

Meanwhile, businesses outside the military are short of staff and are having to pay higher wages.

Prices are rising because of the military campaign, said Alexandra Prokopenko of the Carnegie Russia Eurasia Center in Berlin. Wages are rising because employers have to compete to attract workers.

Other economists assess that in the country of birch trees, national income has increased, but there has been no significant improvement in health care, education, technology and infrastructure.

Main obstacle

In an effort to curb inflation, the Russian Central Bank raised its key interest rate in October to a record high of 21%.

On this issue, economists noted: "Increasing inflationary pressures will not only continue but may even continue to rise."

Russian President Vladimir Putin said earlier this month that the economy needs nearly 1 million new workers as the unemployment rate is 2.4%, or “almost no unemployment.”

Mr Putin described the country's labour shortage as one of the main obstacles to economic growth.

“We have about half a million people working in the construction industry. This industry will need another 600,000 people. And the manufacturing industry needs at least 250,000 more people,” the Kremlin leader informed.

High labor costs and interest rates are putting pressure on companies.

Alfa Bank said in October 2024 that companies were already struggling and that with the key interest rate rising to 21%, the situation would become even more difficult. "We do not rule out the risk of corporate bankruptcies increasing," Alfa Bank said.

The bank also expects the key interest rate to be raised to 23 percent by the Central Bank of Russia next month.

At the heart of the current situation is Kremlin spending. The military budget will increase by almost a quarter by 2025, accounting for a third of total state spending and 6.3% of GDP. Add in other spending under the umbrella of so-called “national security” and it accounts for 40% of the federal budget.

According to a draft budget released in September, Russia's defense spending in 2025 will be at least twice as much as social spending, including welfare and pensions.

Russia's GDP is forecast to grow 3.6% this year. (source: CNN)

The economy is "booming"

Russia's economy was predicted to collapse after unprecedented sanctions from the West in 2022. But contrary to predictions, the economy has unexpectedly "exploded".

Russia's GDP growth in the third quarter of 2024 is provisionally estimated at 3.1% year-on-year, the Russian Federal State Statistics Service (Rosstat) said.

The manufacturing sector was the main driver of GDP growth, with the machinery segment contributing the most. High figures were evidenced by the output of each type of motor vehicle and equipment, including railway cars and locomotives.

The International Monetary Fund expects Moscow's GDP to grow 3.6% this year. By comparison, the forecast in Washington is 2.8%.

Western sanctions have not brought Russia down either. The country has avoided sanctions by importing Western technology through third countries, especially through Central Asia and Turkey.

And despite all the sanctions, the European Union's (EU) imports from Russia still reached nearly $50 billion last year.

The Kremlin still reaps benefits from oil and gas exports to India and China – largely through the “shadow fleet”.

Domestically, state revenues are rising, particularly through sales taxes as Russians spend more.

According to Russia's State Statistics Service, inflation-adjusted incomes rose 5.8% in 2023 as companies snapped up workers.

For millions of people working overtime, especially in IT, construction and manufacturing, now is a great time. And especially the wealthy who used to spend a lot of money on vacations in Europe are now in Russia and spending money. This continues to boost the economy.

Families also benefit from higher wages.

Not everyone benefits

Public sector workers — including doctors and teachers — as well as pensioners and social welfare recipients are being hit hard by inflation, Mr Prokopenko said, and Mr Putin’s country has no solution to its chronic labour shortage.

Not only that, according to experts, the country's long-term demographic situation is also very bleak.

The United Nations expects Russia's population to fall to 142 million by 2030, from just under 145 million today. The country's median age is also rising: More than a fifth of the population is in their 60s.

The UK Ministry of Defence estimates that 1.3 million people will leave Russia in 2022 as Moscow launches a special military operation in Kiev. This will exacerbate the country’s already shrinking workforce. Many of those leaving are young professionals.

Analysts say the Russian economy faces a looming crisis.

Despite its surprising resilience over the past few years, the Russian economy remains vulnerable to shocks amid global uncertainty. Lower commodity prices, slowing demand for Moscow’s crude from Beijing and the trade war will all hit the economy.

And when the military campaign ends, Russia will have to adapt to a new economy, where military priorities will have to be reduced and the industries that benefit will have to change.

Inflation in Russia is soaring and experts predict the economy faces a looming crisis.

Main obstacle

The economy is "booming"

Not everyone benefits

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