Moscow took sharp action on Friday to curb inflation, fearing the effects of ever higher spending on the war in Ukraine and of a weakening Russian ruble.
Russia’s central bank took the unexpected step of raising its benchmark interest rate by a full percentage point, to 8.5 percent from 7.5 percent. It was the first large hike in more than a year, and the bank warned that further increases were likely.
“It is a surprise and on its face reflects more concern at the central bank about inflation and how the economy is doing than we had appreciated,” said Robert Kahn, the head of the Geoeconomics Team at the Eurasia Group, a New York-based risk analysis firm. “It suggests that the war is proving increasingly disruptive to economic activity and pushing up inflationary pressures.”
If the idea that sanctions would bring the Russian economy to a standstill has waned, the war’s effects are still rippling through the economy in other ways including much higher military spending, labor shortages and a steadily worsening trade balance, experts said.
Elvira Nabiullina, the central bank governor, only made oblique references to the war in announcing the increase. “Companies cannot immediately open new production lines and find the additional work force for them,” she said. “When demand begins to consistently surpass the ability to increase supply, prices invariably grow.”
The bank forecast that inflation would reach 5 percent to 6.5 percent this year, lower than at the end of last year, but still above its 4 percent annual target.
Experts pointed to a number of factors at play. First, the ruble has weakened markedly against other currencies in the weeks since the mercenary commander Yevgeny Prigozhin led his Wagner Group in an anti-government rebellion in late June, rising to over 90 to the U.S. dollar from about 83. Since Russia imports vast amounts of goods, a weaker ruble pushes up prices.
That is particularly problematic for Russia because President Vladimir V. Putin has linked numerous social spending programs to the inflation rate. “It’s sort of a key plank of Putinism that pensions and other payments will be kept in line with inflation,” said Charles Lichfield, deputy director of the Atlantic Council’s GeoEconomics Center. “They may not even be able to afford it.”
No one is quite sure how much the government is spending on the military, for everything from new armaments to higher salary payments to hundreds of thousands of newly minted soldiers. The one-third of government spending that goes to defense and security-related matters is now classified, but there is no question that such spending has been mushrooming.
Mr. Putin’s government has poured billions into producing weapons and matériel for a prolonged war in Ukraine. It has also showered the country’s citizens, including the residents of the occupied regions of Ukraine, with subsidized mortgages and other social payouts. At the same time, salary and compensation payments to Russian fighters in Ukraine have pushed up average salaries, stoking inflation and leaving many civilian industries struggling to attract workers.
The labor shortages have been worsened by the exodus of hundreds of thousands of working-age Russians in protest against the war or to avoid mobilization. Tens of thousands more have died on the battlefields of Ukraine, according to some estimates.
At the same time that it is making those huge outlays, the government is earning far less from energy exports, though they remain significant. In June the Central Bank reported its first negative trade balance since 2020.
In addition, Russians have now transferred some $40 billion in cash holdings abroad since the war began in February 2022, Mr. Lichfield noted. Right after the Ukraine invasion, the government sharply limited the amount of foreign currency people could move out of the country, but those controls have gradually been relaxed.
Mr. Lichfield said the government policy right now of spending far more money than it is earning underscores the potential for ever higher inflation. “The Russian government is scared of it getting out of control because it is pumping money into the economy,” Mr. Lichfield said.
Overall, the central bank said the economy would grow up to 2.5 percent this year, effectively recovering to the “pre-crisis” levels of activity, a euphemism for the period before the full-scale invasion of Ukraine. Yet Ms. Nabiullina’s announcement of the growth prediction also contained a note of caution.
The Russian economy could be headed for overheating, she said, adding that “our goal is to not permit that risk.”