Russia economy meltdown looms as Putin is handed dire stagflation warning

By Ciaran McGrath, Senior News Reporter

Russian President Vladimir Putin (Image: Getty)

Russia may be on the brink of an economic meltdown, with Moscow’s attempts to curb inflation pushing the country into what could be its most severe crisis yet, research published by a state-aligned think tank has suggested.

On Wednesday, the Centre for Macroeconomic Analysis and Short-Term Forecasting (TsMAKP) criticised Russia's restrictive monetary policy, warning high interest rates may drive the economy into stagflation - a combination of economic stagnation and persistent inflation.

The think tank’s report warned: "Due to the central bank's actions, the Russian economy is effectively facing the threat of stagflation."

Stagflation presents a unique challenge for any central bank, as it eliminates traditional solutions to economic slowdowns.

Generally, central banks might lower interest rates to stimulate growth, but with rising inflation, rates must remain high to contain price surges, leaving policymakers in a bind.

The price of potatoes in Russia has risen by 64 percent this year (Image: Getty)

Russia's central bank has already flagged the risk of stagflation, noting that inflation remained high in the first half of 2024, despite weakened domestic demand.

In response, the bank hiked its key interest rate to a historic high of 21% last month, with further hikes anticipated.

However, inflation pressures remain stubborn, with annual inflation recorded at 8.54% in October and food prices - particularly staples such as potatoes, which have risen by 64% this year - continuing to soar.

While inflation seems unaffected by these policies, Russian business leaders are increasingly jittery.

Sergei Chemezov, who is the CEO of the state-owned defence giant Rostec, warned that sky-high interest rates are eroding business profitability and could lead to widespread bankruptcies. TsMAKP echoed these concerns.

He cautioned that “the current high interest rate and the prospect of further increases create a risk of economic downturn and a collapse in investments.”

In the shadow of stagflation, Russia’s economy seems to be deteriorating rapidly.

Recent data showed a 3.1% contraction year-on-year in the latest quarter, with more slowdowns expected as war-related disruptions and stringent monetary policies stifle activity and weaken domestic demand.

Analysts at Capital Economics expect Russia’s central bank to increase the interest rate to 22% in the coming month, predicting that inflation will stay elevated and that the Kremlin may face an economic scenario with few, if any, effective options.