Ruble on the decline

Expert: Central bank does not have the situation under control

(Bild: AFP/Natalia Kolesnikova)

Since the beginning of August, the Russian rouble has lost almost a quarter of its value. Although the central bank in Moscow recently raised its key interest rate to 21 percent in order to curb high inflation, the currency is still flying low. Economist Vasily Astrov explains why this is the case.

"The central bank no longer has the situation fully under control. Since mid-2023, it has been trying to tame rising prices with ever higher interest rates. However, inflation has not abated and has even accelerated in some cases," says the Russia expert from the Vienna Institute for International Economic Studies (wiiw) in an interview with the German magazine "Spiegel".

Interest rate hikes are having no effect
The Russian central bank's interest rate hikes are not having any effect because, on the one hand, state loans far below market value - e.g. for the arms industry - make it impossible to control lending efficiently and, on the other hand, there are structural inflation drivers. These include strong wage growth - wages are rising by eight to nine percent per year in real terms, according to Astrov (picture below).

wiiw expert Astrov sees the danger that the central bank in Moscow will drive the Russian economy into recession.

(Bild: wiiw/Hans Schubert)

Due to US sanctions, Russia is also forced to process many imports via third countries, which increases costs. They make imported goods and services more expensive, which also contributes to high inflation. Officially, the central bank is forecasting inflation of a maximum of 8.5 percent this year, while its former deputy head Oleg Vyugin estimates true inflation at 18 to 20 percent.

"Pressure on the real economy is increasing"
 According to Astrov, although the rise in interest rates is hardly dampening inflation, it is having a different effect: loans have become very expensive for many companies. The number of companies with payment defaults rose by around 70 percent from the second to the third quarter of 2024. "The pressure on the real economy is increasing," says the expert, who sees the risk of the central bank driving the Russian economy into a recession.

"Wrong monetary policy decisions"
For the wiiw expert, the Russian economic weakness is a consequence of wrong monetary policy decisions. The problem is home-made, he says in the "Spiegel" interview. In addition, around one million Russians have left the country since the start of the war - mainly members of the urban middle class and IT specialists. The economy now lacks these workers.

On the one hand, there is also a demographic change in Russia - the birth rate is always lower than the death rate - and on the other, fewer foreigners are coming into the country. Until the start of the war, it was mainly people from the Caucasus and Central Asia who took low-paid jobs. As the rouble has lost a lot of its value, there is less incentive for them to work in Russia.