Inflation and currency issues threaten Russia's economic stability

Business Insider highlights that Russia's economy is facing a precarious situation, heavily influenced by the ongoing war in Ukraine and the resultant Western sanctions.

War may be the sole factor keeping Russia's economy afloat. According to Jay Zagorsky, an economist at Boston University's Questrom School of Business, the invasion of Ukraine is likely the only thing preventing Russia from entering a recession. The country's substantial military budget is providing temporary support for its struggling economy, but this solution is not sustainable, he explained to Business Insider.

The Kremlin faces escalating challenges, including rising inflation and ongoing currency and budget issues. "The Russian economy is currently sustained by significant government spending, which means there won't be a slowdown in sectors from which the government is procuring supplies," Zagorsky noted, citing purchases of uniforms, boots, ammunition, and food for the war effort. "Without the war, yes, there would be an immediate recession."

While the conflict continues, the timing of a potential downturn remains uncertain, according to Yuriy Gorodnichenko, an economist at the University of California, Berkeley, who also foresees difficulties ahead for Russia. The country is reportedly allocating a record 13.2 trillion rubles for its defense budget next year, which could help stimulate the economy. However, Gorodnichenko warns that such massive spending cannot last indefinitely. 

"With government funding, they can keep the economy afloat, but eventually, the government will run out of money, and a recession will follow," he said. Several warning signs indicate trouble within Russia's economy. Inflation is a significant concern, according to Zagorsky. Official statistics show that consumer prices rose by 9 per cent year-over-year in August, but he suspects the actual rate may be much higher. 

The Bank of Russia raised interest rates to 19 per cent in September—the highest level since the invasion began—prompting emergency measures from central bankers. "This suggests to me that inflation may be even more severe than reported, akin to the Soviet Union's practice of downplaying inflation figures during the Cold War," Zagorsky remarked. 

Russia's economy is also grappling with currency issues, according to Gorodnichenko, who highlights the country's limited access to the dollar due to Western sanctions. This restriction has hindered Moscow's ability to trade, particularly for oil and crude products, which are vital sources of revenue. 

By Naila Huseynova