The wartime economy in Russia is experiencing a slowdown, leading to tensions among the country’s economic elites as the conflict with Ukraine nears its fourth year. Recent official data indicates that many civilian industries have ceased growth, with some even declining as of October.
The Russian ruble has fallen to its weakest level in two years, complicating businesses' efforts to secure new loans and receive payments from clients. In response, the central bank raised its benchmark interest rate sharply to 21 percent in October, the highest level since the end of the Soviet Union, aiming to combat inflation.
The central bank also revised its economic growth forecast for the next year down to between 0.5 and 1.5 percent, a significant drop from the 3.5 to 4 percent anticipated for this year. This economic slowdown persists despite the government injecting record amounts of funds into the economy to support the war effort.
Economists and officials are cautioning that the combination of rising prices and decreasing economic activity could lead Russia toward stagflation, where inflation rises without concurrent growth. The impact of Western sanctions, imposed over the past three years in response to the invasion of Ukraine, appears to be affecting the Russian economy, diminishing the stimulative effect of government spending.
Civilian industries are particularly affected, with Russian Railways reporting a nearly 9 percent decrease in freight volume in October compared to the previous year. The company plans to raise prices by over 10 percent in December and reduce its 2025 investment plans by a third.
Despite these issues, the economic strains have not yet escalated to a level that would force a reconsideration of military ambitions in Ukraine. However, tensions are rising between industrialists and the central bank regarding borrowing costs, which may have significant implications for Russia’s post-war economy.
Public disagreements between industrialists and central bank officials have surfaced, with complaints directed at Central Bank Chief Elvira Nabiullina for high interest rates that are perceived as detrimental to economic growth. Nabiullina defends her monetary policies as essential for controlling inflation, which currently stands at 9 percent annually.
Criticism has intensified, even drawing remarks from Prime Minister Mikhail Mishustin, who linked high interest rates to decreased investment. A Moscow-based research organization stated that nearly half of Russian companies are struggling to obtain loans, contributing to economic stagnation.
The Russian Union of Industrialists and Entrepreneurs (R.S.P.P.) reported a significant increase in member companies unable to collect payments, attributing the issue to high interest rates. An internal report leaked to the media prompted calls for the central bank to align its monetary policy with the government, challenging its independence.
Nabiullina responded by emphasizing the importance of economic stability and the limited potential for growth under current conditions. Central bank reports indicate a concerning economic outlook, with a noted decline in payments received by companies across various sectors.
The ruble's value has diminished further due to new American sanctions on Russian banks, reaching 109 against the dollar, its lowest since March 2022. This decline increases costs for Russian companies purchasing foreign goods, feeding into inflation and undermining the central bank's strategies.
Despite these challenges, economists do not predict an imminent collapse of the Russian economy. Wages have been rising faster than inflation, contributing to an improved standard of living for many Russians. The Kremlin continues to finance the war through increased taxes and drawing on its sovereign wealth fund, maintaining a manageable debt burden.
The ongoing conflict has shifted the focus of Russian business elites towards seeking immediate profits rather than long-term investments. This pressure for cheaper financial resources could potentially disrupt the checks and balances that have characterized the Russian economy during much of Putin's tenure.
Experts suggest that without a compelling vision for the future, the pressures of wartime conditions may encourage a focus on short-term gains within the business community.