The Russian economy is facing significant stress due to the ongoing war in Ukraine, with US President-elect Donald Trump potentially using aggressive sanctions and energy policy as a tool for negotiations. However, it remains unclear whether the new administration will exert pressure or prioritize friendship with Moscow.
A clearer indication of Russia’s economic difficulties is its tight monetary policy. Compared to Turkey, which has an interest rate of 47.5%, Russia’s rate at 21% appears moderate. But when adjusting for inflation, Russia’s real policy rate is over 10%, the highest globally, except for Brazil.
Russia’s war economy is growing rapidly, driven by increased defence expenditure and a focus on shielding civilians from war costs. The shortage of dollars also contributes to high interest rates. With Putin’s expansion of the military and brain drain, excess demand for labour has led to unsustainable wage growth, challenging the Central Bank’s 4% inflation target.
Falling convertible currency inflows have further exacerbated the situation. Russia’s exports to advanced economies have decreased significantly, resulting in a substantial decline in foreign exchange income. Trade with countries that don’t pay in hard currencies has increased sharply, reducing the rouble’s external value. The loss of the rouble’s value is driving the Central Bank’s decision to raise interest rates high.
This tightening monetary policy is closely tied to the rouble’s dollar exchange rate, with Russia’s inflation-adjusted policy rate tracking it very closely. As a result, high interest rates are needed to maintain control over inflation and stabilize the economy.
Source: https://www.chathamhouse.org/2025/01/russias-economic-dilemmas-give-trump-important-leverage-negotiations-ukraine-will-he-use-it