Russia is facing the mounting risk of stagflation, a think tank tied to the Kremlin has said.
TsMAKP said the nation’s high interest rates would trigger an economic downturn while inflation remains high.
Russia’s tight monetary policy is costing businesses profitability and risks spurring bankruptcies.
Moscow’s failed attempt to stamp out inflation is driving the country toward its worst-case economic scenario, a Russian think tank tied to the government has said.
On Wednesday, TsMAKP condemned Russia’s tight monetary policy, warning that high interest rates would 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.
This scenario, in which 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.
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