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- Russia's Interest Rates Soar to 23%: A War Economy Under Pressure
Russia's Interest Rates Soar to 23%: A War Economy Under Pressure
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Russia’s interest rates are set to hit a staggering 23% this month. To understand what’s happening, let’s dive into why inflation is running wild in Russia and why this war-fueled economy could be headed toward an economic breaking point.
The Inflation Problem: Prices Are Skyrocketing
Inflation in Russia has been hovering around 9% for the past year, but some essentials have seen jaw-dropping price hikes:
Bread: Up 12%
Milk: Up 15%
Butter: Up 30%
Potatoes: Up 74%
This surge in prices has created desperation in households. Reports of food theft, particularly for items like butter, have forced some grocery stores to lock up their stock.
The Russian Central Bank’s response? The same playbook central banks use globally: raise interest rates to cool inflation. Rates have already soared to 21%, but this solution comes at an enormous cost.
The High Price of High Interest Rates
Raising interest rates curbs borrowing, but for businesses and individuals in Russia, the price is brutal:
Homeownership: Out of reach for many due to soaring borrowing costs.
Corporate bankruptcies: Up by 20% this year alone. Over 200 shopping malls are reportedly facing bankruptcy because of loan repayment pressures.
State industries: Take Russian Railways, the largest freight and passenger operator in the country. Burdened by ballooning interest payments (up $4 billion since rates began rising), it has had to slash its planned investments by a third.
But here’s the kicker: raising interest rates hasn’t stopped inflation. Why? Because inflation in Russia is not driven by typical economic overheating—it’s driven by war.
Putin’s War Machine: Fueling the Economy, But at a Cost
Russia’s war in Ukraine has turbocharged spending, creating the illusion of an economic boom:
Unemployment sits at a near-impossible 2%, artificially low because of massive recruitment into the armed forces and defense industries.
Wages are rising rapidly, up 9% in 2024 after 8% growth last year, but only for those in war-related sectors.
For industries producing tanks, rockets, and ammunition, business is booming. Military salaries have skyrocketed, with signing bonuses worth thousands of dollars. Even the families of soldiers killed or injured in war are receiving substantial payouts.
But this war-driven “boom” comes at an extreme cost for the rest of the economy:
Labour shortages: Every sector is bleeding workers to the defense industries. Factories, teachers, and small businesses simply can’t compete for wages.
High borrowing costs: With interest rates above 20%, businesses unrelated to defense are being crushed.
As more resources—both human and financial—are sucked into the war effort, sectors critical for the everyday economy are being left underfunded. This imbalance makes the economy vulnerable.
Sanctions and the Ruble Crisis
Western sanctions have isolated Russia economically, restricting its ability to import goods and crippling its currency. The ruble has plummeted to new lows, further driving up the price of imported goods and worsening inflation.
This has created a vicious cycle:
Inflation keeps rising.
Businesses and citizens face tighter financial pressures.
The Russian government pours more money into defense to keep the war machine running.
The Breaking Point: An Overheated Economy on the Edge
Putin’s wartime economy is unsustainable. Military spending now consumes one-third of Russia’s entire budget—a staggering figure unmatched by almost any other nation.
The result?
Economic growth is set to slow dramatically, from a high of 4% this year to less than 2% in 2025.
Inflation will continue to outpace wage growth for most sectors outside defense.
Workers will become harder to find as the war effort consumes Russia’s labor force.
Experts warn that if this trend continues, Russia could face a tipping point: a collapse of its wartime economy, spiraling into hyperinflation and deep economic hardship.
Conclusion: A War Economy That Can’t Keep Up
Russia’s economy may look strong on paper, but it’s built on fragile foundations. Military spending and inflation are creating a dangerous imbalance that can’t last forever. As sanctions bite, interest rates soar, and costs of living rise, the question isn’t if the Russian economy will buckle—it’s when.
Putin’s war machine has kept the economy running hot. But as the workforce shrinks, prices spiral, and the country’s economic gears grind against each other, a reckoning is coming.
How long can Russia keep the engine running before it burns out completely?
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