The Russian economy threatens to derail into a serious disruption

Russian new risks shaking the economy.

One of them is a news agency Bloomberg’s according to the significant, almost 45 percent strengthening of the ruble against the US dollar.

The strengthening of the ruble is mainly due to the fact that the demand for foreign currencies in Russia has decreased due to the sanctions. In addition, monetary policy is exceptionally tight due to inflationary pressures, which tends to strengthen the external value of the currency.

The central bank’s policy rate is currently 16 percent, and the increase in consumer prices, or inflation, was 6.6 percent in November.

Tight monetary policy reduces economic activity. Due to high interest rates, households typically reduce their consumption and companies their investments.

In Russia, the investment prospects of private companies have already become clearly weaker and the growth of investments has stopped.

Based on the purchasing managers’ index produced by the research company S&P Global, industrial production has decreased for six consecutive months. The purchasing managers’ index is a key barometer of the economy.

Also the outlook for public finances is bleak.

Due to sanctions imposed by Western countries, the Russian government’s income from energy trade has decreased significantly. According to the Russian Ministry of Finance, they decreased by 22 percent during the 11 months of the current year, Bloomberg reports.

Due to shrinking incomes and growing expenses, the state has to tighten taxation and cut public spending.

Income from the energy trade was once transferred to the National Welfare Fund in case of a bad day. Its quickly cashable funds are starting to run out, as they have been used in abundance to finance the full-scale war of aggression started by Russia in Ukraine.

Second the threat is stagflation.

According to Bloomberg, the Russian financial research institute Stolypin Institute has warned about it. According to it, the risk of stagflation will increase if the strengthening of the ruble continues, combined with an increase in the cost of financing.

Stagflation means a serious disruption of the economy, during which economic growth is slow, unemployment is high, but inflation is rapid. It is often difficult to get rid of stagflation very quickly.

“The economy has drifted to the brink of stagflation for the first time since the beginning of 2023”, estimates an expert on the Russian economy Dmitri Belousov newspaper earlier in December of the Financial Times by.

However, unemployment in Russia is currently exceptionally low, as the military industry financed with public funds has increased the demand for labor in several industries.

According to the forecast of the Bank of Finland’s Research Institute for Emerging Economies, the Russian economy will grow by about 1 percent per year in the next few years. It would be significantly less than the average over a long period of time.

“Recently, economic growth has been almost non-existent and inflation is fast. In his opinion, the threat of stagflation in Russia is real, even though unemployment is still low. The labor market is probably weakening, because in some companies the payment of wages in Russia has been delayed, which is very rare,” says the head of the Bank of Finland’s Research Institute for Emerging Economies Iikka Korhonen.

The third According to the Financial Times, a sign of the fragility of the economy is that the increase in wages in Russia has slowed down despite the tight labor market.

A tight labor market means that the demand for labor is greater than the supply.

“The slowdown in wage growth means that other indicators – including the level of consumption and related taxes – will follow,” said a researcher at the Kyiv University of Economics who specializes in the Russian economy. Elina Rybakova Financial Timesille.