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Russian Economy Faces 'Creeping Crisis', Economists Warn

Russia's wartime economy may still be growing but it could face problems in the second half of this year, according to predictions by a key Moscow think tank.
Vladimir Putin's full-scale invasion of Ukraine has been met with sanctions which have caused turbulence but not the collapse of Russia's economy, as Moscow has ramped up military spending and turned to other trading partners to sell its goods.
But high government spending on the military which makes up one-third (29 percent) of total expenditure this year has coincided with two indicators of an overheating of the economy—inflation and a worker shortage, the latter exacerbated by a brain drain, mobilization and high battlefield casualty rates.
Moscow's Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF), which has links with Russia's authorities, has sounded the alarm about what might happen to the country's economy between now and 2025.
Household consumption and capital investment driving growth which in the first quarter of 2024 reached 5.4 percent, could be impacted by another key interest rate rise by Russia's Central Bank, as it seeks to cool an overheating economy said the think tank, cited by Kommersant and the Russian language edition of The Moscow Times.
But an increase in interest rates to dampen inflation could see borrowers unable to cover their debt payments, the think tank said. This could lead to overdue debt on small loans and restructuring of debt on large loans, leading to a "creeping crisis" in the economy.
Russia's key interest rate is at 16 percent but inflation is currently running at 8.3 percent, more than double its 4-percent target. In July, consumer prices in Russia grew by 4.51 percent year-on-year, state news agency Tass reported.
There are already signs of the "future cooling," of the economy, said the CMASF analysis. On July 4, Russia's Central Bank signaled that it might have to take further action, posting on Telegram how "pro-inflationary risks have materialized."
Raising the key rate will be discussed on July 26 by the Central Bank with reports suggesting it could hit 18 percent—close to the 20 percent that was briefly introduced at the start of the war in Ukraine.
As well as sanctions, an increase in the tax burden and lower oil production in Russia could also tighten monetary conditions, leading to a possible revising down on GDP growth for this year, the Moscow Times reported, citing the Institute of Economic Forecasts of the Russian Academy of Sciences.
Independent Russian news outlet The Bell said on June 29 that "the overheating of the Russian economy is now an accepted fact" among top officials including Central Bank head Elvira Nabiullina, and the head of state-owned Sberbank, German Gref.
"Increasingly, it's only Russian President Vladimir Putin still championing Russia's high growth as a major achievement without any awareness of the possible downsides," The Bell added.

Newsweek
Jul 9, 2024 09:51
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