Page 6 - bne IntelliNews Russia OUTLOOK 2025

and promised to be able to lower interest rates in early 2025 to return the economy to a more sustainable path.
The danger is if the CBR loses control over inflation then Russia could be plunged into a protracted period of so-called stagflation, which is very hard to escape from once it begins.
The rate hikes to date have had little effect so far. In an effort to slow growth and cool the economy mortgage subsidies have been nixed, consumer borrowing curtailed and taxes added to corporate deposits to encourage companies to invest. At the same time, corporate borrowing started to slow in December as state-backed guarantees for debt were curtailed. At the time of writing none of these measures had produced visible results, which are expected to appear in the first quarter of 2025.
Higher growth would require a substantial increase in productivity, which seems unlikely given that a considerable share of investment is already dedicated to branches serving the war effort either directly or indirectly. Russian President Vladimir Putin is well aware of the problems and has called for an increase in production and more growth, but the limitations are on the supply side with capacity utilisation at over 80% – already at its practical maximum – and a chronic labour shortage means production cannot easily be expanded even if demand increases.
Almost all the available Russian economic resources have already been used, says Nabiullina, and the country finds itself in an unprecedented situation.
The unemployment rate fell to a historic low of 2.4% in 2024, and the personnel shortage continues to grow, the head of the Russian Central Bank said. Three quarters (73%) of Russia’s enterprises are suffering from personnel shortages.
At the same time, due to increasingly effective US financial sanctions, the official exchange rate against the dollar and the euro exceeded RUB100 for the first time since October 10, 2023 as the currency weakened, further hurting consumption and fuelling inflation.
Is the new budget sustainable?
MinFin clearly thinks that the higher military spending is sustainable and it has managed to contain the federal budget deficit, which was 1.9% of GDP in 2023 and is forecast to be closer to 0.8% in 2024, before falling to zero in 2025.
Despite the heavy military spending, part of MinFin’s calculations is that because a third of this goes on wages, that money is recouped by
6 Russia OUTLOOK 2025 www.intellinews.com