Russia’s Central Bank cut its key interest rate by half a percentage point on Friday—from 16.5% to 16%—the latest retreat in a dramatic reversal that has seen borrowing costs fall five percentage points from their record 21% peak just fourteen months ago.
Governor Elvira Nabiullina is cutting rates to save an economy she once said needed purging.
In October 2024, she defended record-high rates as necessary Darwinism: “A larger share of the market should go to them — not to those that took on debt beyond their capacity,” she said. Now she’s reversing course—even as the Kremlin prepares a January tax hike that will crush the very businesses she’s trying to rescue.
Relief now, tax hammer in January
On 1 January, Moscow raises the VAT rate from 20% to 22% and reduces the exemption threshold from 60 million rubles ($731,000) to just 10 million rubles ($122,000) in annual revenue—approximately 450,000 small businesses will lose their VAT exemption overnight.
The Central Bank cuts rates. The Kremlin raises taxes. The policies pull in opposite directions.
It echoes Türkiye, where President Recep Tayyip Erdogan’s insistence on cutting rates despite high inflation crashed the lira. Russia’s situation differs—official inflation fell to 6.64% in November—but Russians don’t believe the numbers. Household inflation expectations surged to 13.7% in December, Bloomberg reported, as people brace for the January price shock.
War economy eats civilian life
The Bell, an independent Russian economics outlet, reported this week that parts of Russia’s economy, unconnected to military production, are stagnating, with even major state companies struggling to service their loans.
“Large companies will survive, but small ones may simply tip over—and we could lose them,” Renat Mistakhov, director at state shipbuilding corporation Ak Bars, told Bloomberg.
“Without them, certain products simply can’t be made.”
The numbers confirm it. Registered businesses in Russia fell to 3.17 million as of September, the lowest since 2010. More companies closed than opened in the first half of 2025. The World Bank downgraded Russia’s growth forecast to 0.9% for 2025 and 0.8% for 2026—what economists call zastoy, the Soviet-era term for stagnation.
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“The Bank of Russia will maintain monetary conditions as tight as required to return inflation to the target,” the regulator said Friday, signaling double-digit rates will persist for at least another year.
Two central banks, two strategies
The contrast with Ukraine is sharp. Both maintain double-digit rates: Ukraine at 15.5% and Russia at 16%. But while Nabiullina cuts under pressure, Ukraine’s National Bank is holding firm despite faster-than-expected inflation decline, prioritizing currency stability over short-term relief.
Russia’s rate cut buys a few weeks of cheaper credit. Then the January tax hike lands.
