Efforts by the Central Bank of Russia to rein in inflation through interest rate hikes are not only ineffective but also edge the Russian economy towards a precipice. Even analysts close to the Kremlin concede this inconvenient truth for Russia's leadership. According to a forecast by the economic center CMACP, which is close to Russian authorities, the Russian economy is headed for a shock, which is expected to bring about a production decline, corporate bankruptcies, and a surge in unpaid debts.

The report indicates that the Russian economy currently faces the dual threat of stagnation or recession alongside high inflation. By the year’s end, the proportion of manufacturing companies facing risky levels of interest payment burdens is predicted to double to 20% of total manufacturing output. Such a scenario significantly raises the risk of corporate defaults and insolvencies.

In the third quarter of this year, Russia experienced a sharp increase in companies grappling with non-payments from counterparties, with the number rising from 22% to 37%. This trend not only impacts production but also clouds business transparency and amplifies the risk of adverse social consequences.

The Central Bank's attempts to control inflation by raising benchmark rates are failing since much of the price surge stems from supply-side shocks, unrelated to demand dynamics. These shocks include seasonal price increases, rising tariffs, and logistical and cross-border payment challenges.

Analysts warn that raising rates may only have a limited impact on reducing inflation. However, it substantially raises the risk of a recession.

To prevent negative economic momentum, the interest rate needs to stabilize at 15-16% by mid-next year. The Central Bank of Russia, however, expects it to be between 17-20% during this period.

  Russia, Russian Economy

Comments