Page 15 - RusRPTAug24

Why can’t the economy be cooled?
The main culprit for overheating is the state, which is spending record amounts amid the war in Ukraine. According to analysts from the Gaidar Institute, budget expenditures in 2022 and 2023 went up 17.2% and 14.2% respectively. That caused the share of government spending in Russia’s GDP to rise from 34.7% in 2021 to 36.6% in 2023.
In an attempt to cool the economy and stabilize inflation, which reached 8.6% at the end of June, the Central Bank has held interest rates at 16% for more than six months. Reports suggest some members of the Bank’s board of directors want to see further rises, perhaps up to 18%. This is approaching the 20% rate introduced at the start of the war in Ukraine (although it was quickly lowered). Analysts at most of Russia’s top banks anticipate that the Central Bank is going to raise interest rates in the coming months.
In theory, high rates should cool the economy – the higher interest rates, the more expensive it is to borrow (which dampens demand and inflation). Right now, though, this doesn’t seem to be happening. The reasons for this are a subject of disagreement.
Economist Georgy Zhirnov has suggested that the failure of high interest rates to impact the economy is down to high levels of “non-market” borrowing, especially state-subsidized mortgages. Many other economists agree. However, Zhirnov has also pointed out that, in the first half of this year, the volume of approved mortgages was down 60% on the equivalent period in the previous year. This suggests high interest rates are having an effect.
One Russian banker highlighted to The Bell that certain sectors of the economy are also receiving subsidized loans – particularly, agriculture and manufacturing. “We estimate the discount at 1.5-2 percentage points,” he said.
What happens next?
There is no clear consensus about what might happen when the economy stops overheating. Many have walked back more dramatic predictions of a banking crisis, or deep recession. Most believe the Kremlin will be able to contain the fallout.
It’s true that a positive output gap (when actual output is more than full-capacity output) can end up in a recession. And this scenario has been widely discussed on influential economy-focused Telegram channels like “Hard Figures” and “MMI.”
15 RUSSIA Country Report August 2024 www.intellinews.com