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| Russian President Vladimir Putin's administration has managed to keep his country's economy humming despite sweeping Western sanctions, but there are growing pressures. Gavriil Grigorov/Sputnik/AP |
Russia has managed to rein in rising inflation, offering a rare economic victory amid global sanctions and war spending. But that success may be short-lived as the country begins to feel the strain of stagnant growth and weakening industrial activity.
The Bank of Russia recently reported that inflationary pressures are easing more rapidly than expected, with the annual inflation rate dropping from 8.2% in the first quarter to 4.8% in the second quarter of 2024. In response, the central bank trimmed its key interest rate from 20% to 18%, signaling that the immediate inflation crisis may be under control.
Yet, as Alexander Kolyandr, a senior fellow at the Center for European Policy Analysis, put it, the bank’s optimistic message that the economy is “returning to a balanced growth path” may simply be code for a period of “anemic growth.”
Interest Rate Cuts Signal Inflation Control but Also Economic Weakness
Although Russia has made notable progress in curbing inflation, the underlying cost of that progress is becoming harder to ignore. By raising interest rates aggressively through much of 2023, the Bank of Russia managed to cool an overheated economy, driven in large part by unprecedented defense spending.
The central bank now forecasts its key interest rate will average between 18.8% and 19.6% in 2024, before falling to around 12% to 13% in 2025. That policy has helped tame inflation, but it has also made borrowing costlier and discouraged both consumer spending and private investment.
Russia's economy, already battered by sanctions and geopolitical isolation, is now at risk of losing its last major source of economic momentum: government-fueled wartime expansion.
Manufacturing Slows, Growth Momentum Wanes
Russia’s economic slowdown is becoming increasingly apparent. After posting a 1.4% GDP increase in the first quarter a notable decline from the previous quarter’s pace the country’s manufacturing sector contracted sharply in July.
S&P Global’s latest Purchasing Managers’ Index for Russia revealed the steepest decline in manufacturing activity in three years. The report cited “weak client demand and financial difficulties at customers” as major drags on output and new orders. Business confidence has also slumped to its lowest level in three years.
This downward trend suggests Russia’s economy, once bolstered by military production and energy exports, may now be running out of fuel. With international sanctions squeezing supply chains and limiting foreign investment, the country’s growth options are narrowing fast.
A Tightrope Between Inflation and Recession
Russia’s policymakers now face an increasingly difficult balancing act. On one hand, keeping inflation low is critical for stabilizing household budgets and avoiding further erosion of the ruble. On the other, maintaining high interest rates risks deepening the slowdown in consumer activity, job creation, and industrial investment.
The Kremlin's reliance on oil and gas exports has helped it sustain a wartime economy, but fluctuating global energy prices combined with sanctions and limited access to Western markets pose a significant threat. Lower oil prices, in particular, would cut deeply into fiscal revenues, increasing the likelihood of budget deficits and social spending cuts.
Kolyandr of CEPA noted that while the Kremlin may tolerate a short period of stagnation, the real risk is that economic cooling could tip into a prolonged recession one that would be difficult to reverse without major policy shifts or a de-escalation of the Ukraine conflict.
Trump Applies New Pressure With Secondary Tariffs
Complicating the picture further is renewed pressure from the United States. President Donald Trump recently announced a new wave of tariffs targeting Russia’s key allies and trading partners, including India. His administration has imposed a 25% tariff on Indian exports and additional penalties on India for purchasing Russian oil.
These measures are designed to increase the cost of doing business with Russia and further isolate the Kremlin from the global financial system. If widely enforced, secondary sanctions and trade penalties could shrink the market for Russian oil and gas still the country’s most important source of hard currency while discouraging neutral nations from supporting Moscow’s war economy.
Russia's Economic Gamble Is Risky
As inflation eases and interest rates slowly decline, Russia faces a moment of reckoning. Can the Kremlin keep the economy afloat through wartime spending without fueling another inflation spiral? Or will tightening conditions, sanctions, and falling business confidence finally take a toll on growth?
With the International Monetary Fund forecasting just 0.9% growth for Russia in 2024 and domestic manufacturing slumping, the outlook is increasingly uncertain. Meanwhile, international efforts to restrict Russia’s financial lifelines are escalating, adding pressure to a fragile economic recovery.
For now, Russia’s inflation fight appears to be working. But the longer-term cost slower growth, declining industry, and reduced investor confidence may be harder to manage.
