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UK intel: Defense spending drives inflation surge in Russia

Russia’s economy faces heightened inflation, mainly due to surges in defense spending, challenging economic stability amid its war in Ukraine. The Central Bank’s policies and the risk of an overheating economy present additional complexities in managing the situation, as per UK intelligence.
Russian major tank producer Uralvagonzavod’s production line. Photo via news.dialog.ua
UK intel: Defense spending drives inflation surge in Russia

The UK Defense Ministry’s intelligence update on 6 November 2023, indicates a substantial inflation increase in Russia, soaring to 6% in September 2023, attributed to surging consumer costs. In response, the Central Bank of Russia implemented a 2% interest rate hike, reaching 15%, marking the highest levels since May 2022.

The ministry suggests that this measure, in conjunction with escalating demand and increased defense expenditures, may risk an overheated Russian economy, sustaining elevated inflation throughout 2024 and influencing government spending priorities.

Earlier, the British Defense Ministry reported that Russia significantly increased its defense budget and was facing workforce shortages after its military conscription goals rose.

The ministry tweeted:

  • Inflation rose to 6 per cent in Russia in September 2023, up from 5.3 per cent in August 2023. This was driven by rises in consumer prices such as food and fuel. Higher inflation is almost certain to increase the costs of funding Russia’s war in Ukraine.
  • The Central Bank of Russia (CBR) responded by increasing the base interest rate by 2 percentage points, to a new base rate of 15 per cent. These are the highest rates since May 2022. It is highly likely the CBR will maintain high interest rates through 2024. This is highly likely to increase borrowing costs for Russian consumers and is likely to also impact the Russian government’s debt servicing costs.
  • Due to increasing demand, partially due to large increases in defence spending, along with continued pressures of a tightening labour market, the Russian economy is likely at risk of overheating. This is highly likely to ensure inflation in Russia in 2024 remains above the target rate of 4 per cent. Continued high inflation is likely to erode real terms government spending, particularly in areas such as social care with below-inflation spending rises. This further illustrates the reorientation of Russia’s economy to fuel the war above all else.

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