Russia’s economic slowdown continues

Preliminary Rosstat figures show Russian GDP grew by 3.1 % y-o-y in the third quarter. For the first nine months of the year, GDP growth was 4.2 %. Increases in output were largely sustained by massive government spending increases. Consolidated budget spending in January-October rose by 17 % y-o-y. Increased government spending has mainly supported production most closely connected to the war effort.

Russian GDP growth, however, has slowed significantly this year. The latest international forecasts see Russian GDP growing by just 1–1.5 % next year, and that growth will continue to be supported by higher government spending. Russia’s public finances should remain in deficit. Nevertheless, Russia should not have major problems to finance the deficit at least next year.

Large risks to economic growth persist. Russia’s economic imbalances have been worsened by higher government spending and an increased share of spending going to support war-related branches. Inflation has accelerated, with consumer prices rising by 9 % y-o-y in November. The ruble’s exchange rate plummeted in late November and early December, before finally stabilising in recent weeks. The Russian economy is increasingly vulnerable to risks such as lower oil prices or new rounds of sanctions.

Increased imbalances affect economic policy. At the moment, Russian fiscal policy and monetary policy are at complete odds. The increase in government spending has fuelled inflation, which has forced the Central Bank of Russia to raise rates to unprecedented levels to cope with the situation. The CBR’s key rate currently stands at an all-time high of 21 %, and markets expect the CBR board to raise the key rate further at today’s (Dec. 20) regular rate meeting. The CBR has already been criticised for high interest rates and the intense debates over monetary policy are likely to continue next year.