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UK intelligence: Inflation and sanctions push Russia’s economy towards increased financial strain

High interest rates constrain investment, increase debt costs and bankruptcies amid inflation and sanctions, per British intelligence.
byYuri Zoria
13/11/2024
2 minute read
central bank russia file censornet c8dd6917e802e0e8265f98c863048590
Central Bank of Russia. File photo via censor.net
UK intelligence: Inflation and sanctions push Russia’s economy towards increased financial strain

The UK Ministry of Defense’s intelligence update on 13 November reported significant economic challenges for Russia, primarily due to recent interest rate hikes by the Central Bank of Russia (CBR).

Since the onset of Russia’s 2022 full-scale invasion of Ukraine, corporate loan volumes and debt linked to the CBR’s base rate have risen, escalating business debt costs amid Western sanctions and Russia’s shift to a wartime economy.

UK intelligence projects that inflationary pressures will intensify in 2025 due to rising government spending, ongoing labor shortages, and persistent sanctions.

The Ministry wrote:

  • On 25 October 2024, the Central Bank of Russia (CBR) raised its base interest rate to 21 percent. This is the highest rate since the start of the Ukraine conflict and reflects the CBR’s concerns about growing inflationary pressures in the Russian economy. CBR governor Elvira Nabiullina said that “more drastic changes” to monetary policy might be required to get inflation under control. However, there is growing criticism of the CBR’s decision to keep interest rates high from key business executives across multiple Russian industries.
  • High interest rates in the Russian economy are highly likely to restrict business investment and growth. Since the beginning of the war in 2022, the volume of corporate loans and the proportion of them tied to the CBR’s base rate have increased. As a result, higher interest rates are leading to increasing costs of debt. These costs are highly likely exacerbating financial pressures on businesses, with corporate bankruptcies in Russia reportedly 20 percent higher in 2024 than they were in 2023.
  • Inflationary pressures will highly likely continue to intensify in 2025 as government spending is forecast to increase, and labour shortages and pressure from sanctions persist. This will lead to increasing trade-offs between efforts to control inflation and supporting growth of the Russian economy.

UK intelligence previously reported that Russia’s proposed 2025 defense budget would increase by 25%, accompanied by a 16% cut in social spending, prioritizing military funding amid 9% inflation and economic strain from excess demand. Russia also faced historic workforce shortages, with the manufacturing sector particularly affected in Q3 2024. Meanwhile, ISW noted that Russia aims to achieve victory over Ukraine by 2026 despite mounting economic challenges.

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