Putin’s Economic Policies Risking Inflation in Russia

The enduring issue of inflation has long been a challenge for Russia, stemming from years of escalating prices in the aftermath of the 1917 revolution and persistent price pressures during the reign of Josef Stalin. The recent conflict in Ukraine has only exacerbated the situation.

Recent data indicates that inflation in Russia has surged by 7.5% year on year, up from 6.7% the previous month. The central bank is apprehensive about potentially losing control and is contemplating raising interest rates at their upcoming meeting. While the depreciation of the rouble following the invasion of Ukraine in 2022 contributed to the uptick in inflation, currency fluctuations are now having a diminished impact.

A detailed examination of the current economic landscape in Russia reveals signs of an overheating economy. Inflation in the services sector has reached exceptionally high levels, signifying that the driving force behind inflation is internal. Many experts attribute the heightened government spending, particularly on defence, as a significant factor contributing to inflation.

The government’s expenditure on defense is projected to nearly double in 2024, constituting 6% of GDP, the highest since the collapse of the Soviet Union. Furthermore, welfare payments have been augmented, and fiscal stimulus stands at approximately 5% of GDP. This expansionary fiscal policy has resulted in a surge in the country’s growth rate, currently estimated at over 3%.

However, the rapid growth is exerting pressure on the Russian economy. There has been a noticeable decline in the supply side of the economy, with educated workers leaving the country and foreign investors withdrawing significant investments. This has led to heightened demand against reduced supply, culminating in elevated prices for raw materials, capital, and labour.

Whilst increased interest rates and other measures may serve to mitigate inflation, the primary impetus behind Russia’s economic policies is the government’s unwavering commitment to prevail in Ukraine. This could potentially lead to even swifter inflation in the future, posing a substantial risk to the stability of the Russian economy.

In conclusion, Russia is grappling with a critical economic quandary as it contends with escalating inflation due to extravagant military spending and an overheating economy. The situation is further compounded by the government’s assertive fiscal policies and the ongoing conflict in Ukraine. The manner in which Russia will navigate through these economic challenges in the forthcoming months remains to be seen.