Central bank lowers rate to 17% to counter economic slowdown
Russia’s central bank reduced its benchmark interest rate by one percentage point to 17% on Friday, attempting to stimulate a slowing economy burdened by rising war expenditures and a widening budget deficit. The move follows concerns from business leaders and lawmakers that previously high rates, which peaked at 21%, were stifling economic activity.
Despite the rate cut, the central bank maintained a cautious tone. Inflation eased slightly in July and August but remains elevated at 8.2%. The bank warned that inflation expectations remain high, which could hinder a sustained decline in prices. “This may impede a sustainable slowdown in inflation,” it noted, underscoring the delicate balance between growth and stability in the wartime economy.
Wartime spending fuels mixed economic signals
The Russian economy is being pulled in two directions. On one hand, the government is injecting large sums into defense procurement and military recruitment, which has supported short-term wage growth and consumption. On the other, these injections contribute to inflation and widen the fiscal deficit.
Year-on-year GDP growth fell to 1.1% in Q2, down from 1.4% in Q1 and 4.5% at the end of last year. On a quarterly basis, the economy contracted by 0.6%, suggesting that the growth momentum has stalled. The federal deficit reached 4.9 trillion rubles ($58 billion) between January and July, compared to just 1.1 trillion rubles during the same period last year.
Oil revenue falls, domestic debt rises
Russia’s financial stress is exacerbated by a 19% drop in oil and gas revenues year over year, driven partly by weaker global oil prices. The government’s total spending reached 129% of the originally planned amount, according to the Kyiv School of Economics.
Despite sanctions, the Russian economy has shown more resilience than many expected. Unemployment is at historic lows and household incomes are rising, in part due to recruitment bonuses funneled into lower-income regions. Oil exports have remained relatively stable despite price fluctuations.
Domestic bonds plug budget gap
To cover its growing deficit, the Russian government is increasingly relying on domestic banks, which are buying up ruble-denominated bonds. These banks are incentivized by the expectation of further interest rate cuts, making the bonds more attractive as inflation moderates.
This internal financing mechanism helps the Kremlin sidestep external sanctions, but it also highlights the limited tools available as external funding options remain blocked. Russia’s economy faces persistent risks as inflation, reduced revenues, and costly military operations continue to shape its financial outlook.
