Downward angle icon An icon in the shape of a downward angle. Paveletskaya Plaza shopping mall in Moscow, Russia. Getty Images Russians are spending money freely, with per capita consumption surging by more than 20% from 2021 to 2023. The spending comes on the back of an overheated economy, with growth driven by wartime state spending. The Russian central bank has raised interest rates to 18% to combat inflation that is above 9% per year.
Russia’s economy is doing well, some people are spending generously and prices are rising.
Russia’s GDP grew 3.6 percent last year. Unemployment hit a record low of 2.6 percent in April as a brain drain continued as men headed to the war front. Labor shortages have driven up wages and pushed inflation to more than 9 percent annually, well above the official target of 4 percent.
Russia’s central bank on Friday raised interest rates to 18% from 16% to curb rising prices and again warned about an overheating economy.
“GDP growth remained high in the first and second quarters of 2024, but inflation accelerated, indicating that the economy remains significantly overheated,” Russian Central Bank Governor Elvira Nabiullina said while announcing the rate hike on Friday.
Despite widespread sanctions in response to the February 2022 invasion of Ukraine, the Russian economy has not collapsed and even appears resilient, as it is currently driven by wartime state spending on military activities and subsidies.
Russians travel, spend money on culture and hotels
The interest rate hike by Russia’s central bank comes amid a spending boom in the country, where many people seem to be spending quite freely despite the war and Western sanctions, the Financial Times reported on Friday.
Overall, per capita consumption is set to grow by more than 20% between 2021 and 2023, with spending on tourism standing out, surging by more than 90%, according to a Financial Times analysis of official data. Spending on culture, hotels, transport services and personal services also surged.
A Moscow resident told the Financial Times that his neighbour had been showing off photos of his pet lion.
“Everyone in the upper middle class is enjoying a really good life,” Sergey Ishkov, a Moscow investor and entrepreneur, told the outlet.
“Huge budget spending and labour shortages combined are putting strong pressure on wages and driving consumption up sharply,” Bartosz Sawicki, market analyst at fintech firm Konotokia, wrote in a note on Friday.
But military spending, which accounts for about 7 percent of GDP, creates “serious macroeconomic imbalances,” Sawicki added.
The Russian Central Bank could raise interest rates again if necessary.
Finance Minister Nabiullina said on Friday that Russia’s GDP will grow 3.5-4 percent this year compared to 2018, but is likely to slow to 0.5-1.5 percent next year.
He added that the Russian central bank would keep its key interest rate high for as long as necessary to bring inflation back on target, and could raise rates further if necessary to mitigate economic risks.
“Spare labor and production capacity is almost depleted,” Nabiullina said on Friday. “The shortage of these resources could create a situation in which economic growth slows despite any efforts to stimulate demand.”
Moreover, any attempt to stimulate demand would only fuel further inflation, which could create a “stagflation scenario that can only be thwarted by a deep recession,” she warned, explaining the central bank’s sharp interest rate hikes.
The central bank’s next meeting will be held on September 13th.
