In its typically precise fashion, the Bank of Russia has articulated what business leaders and households have known for nearly 15 months: high interest rates are a «fever-inducing» pill that must be swallowed to cure what ails the economy—namely, demand for goods and services that persistently outstrips the economy’s ability to meet it. Fever is an apt metaphor, adjacent to the usual talk of an economy «overheating» in such conditions, signaling a crisis of economic governance. The war’s effect on the economy has been cancerous, its side effects manageable only by «killing» healthy tissue—civilian industries exposed to high interest rates—before the imbalances associated with that cancer multiply further.
Ukrainian strikes on refineries have escalated from an intermittent, marginal concern to a full-fledged driver of inflation and public discontent. In the past week, independent traders have reduced gasoline supplies to the Petersburg Exchange by two-thirds compared to mid-August. To cite one regional example, the price of gasoline in Tambov oblast rose 4.7% in just the last week—a significant spike in a short period, as wholesalers rapidly increase prices for retailers procuring supply for filling stations. While the national shift was officially reported at around 0.5%, this likely reflects political pressure and the vast size of Russia’s regions, where underdeveloped infrastructure often causes price changes to disseminate with a lag. Most strikingly, the government has attributed shortages to the «tourist season,» an explanation as predictable as it is evasive. Maintenance season has contributed, yet the government has intervened to prevent maintenance that would affect product balances in the short term.
The decision-making and situation among Russia’s oil companies remain opaque, but it’s telling that Transneft has warned that expanding Ukrainian strikes on export facilities and refineries may soon force oil companies to cut output. This is a literal case of «burning up» due to explosive strikes. Such cuts would likely do little to alleviate fears of structural oversupply in markets in the months ahead, particularly if a sustained price increase above $ 70 a barrel encourages more drilling in the US. Still, the fever gripping the economy is clearly spreading rapidly.
Surveys of small and medium-sized businesses from Opora Rossii show sales, hiring, and investment slowing or contracting, while borrowing is rising. For months, the question has been: when will something break? It’s now clear we’re at a tipping point, where slowdowns are turning into outright contraction. A third of employers now report no issues with hiring talent, a slow but steady increase since last December. The easier it is for employers to lowball employees, the worse it is for sales elsewhere until interest rates fall significantly, which then impacts investment. Despite any apparent «slack,» shortages have become a structural issue that cannot be resolved while wartime industries operate at their current intensity. Putin has instructed the Duma to consider removing the patent system applied to visa-free labor migrants from Central Asia, which forces them to pre-pay income taxes within 30 days of obtaining a work permit upon entering Russia. Clearly, if the construction sector is to reclaim its role as a driver of GDP growth and the consumer economy, it will need workers from abroad.
Government officials and big business leaders are communicating at cross-purposes with the public. When Aleksandr Shokhin, head of the Russian Union of Industrialists and Entrepreneurs, warns his lobby that the best they can hope for is preventing tax increases, not securing tax cuts, a deeper message emerges: not only will corporate boards serve the war effort as demanded, but the state is also preparing to extract more. Finance Minister Anton Siluanov has announced plans to gradually reduce the budget’s dependence on oil revenue through 2030. Each year, the budget’s oil price threshold will fall by $ 1, from this year’s $ 60 to $ 55, lowering the point at which revenues are diverted to the National Welfare Fund. Yet, simultaneously, Prime Minister Mikhail Mishustin has been tasked with finding 40 trillion rubles for the National Projects through 2030—a sum likely equivalent to 15−18% of current nominal GDP. Putin’s declaration to the Duma that a slowdown in GDP growth is a «necessary measure,» while assuring them that a recession is far off, reveals a widely shared awareness that the economic boom is over. No one can fully insulate themselves from the war’s costs for long.
In an interesting twist, next year’s budget assumes the Bank of Russia will maintain the key rate at 12−13%. For the budget’s parameters to hold, inflation must therefore decline. As usual, Putin tells the public that simply printing money and distributing it would be disastrous for price levels. However, lowering interest rates enough to stimulate business activity is, in effect, «printing money”—a phrase Russian officials misuse without acknowledging that most money creation occurs when banks lend to the real economy and each other, not when a central bank acts unilaterally.
The war has consumed so much capacity and labor that Russia’s current economic conditions share surprising similarities with those in the United States. Evidence of an impending consumer recession is mounting, and uncertainty surrounds the availability of supply to meet demand, as it too faces contraction due to companies halting investment or failing. For instance, the number of new housing builds under construction has fallen 20% compared to the same period last year, threatening to push prices higher despite an unattractive interest rate environment for borrowers and an evident pullback in consumer spending. Supply may now be falling faster than demand. Similarly, this year’s poor harvests have driven up food prices for comparable reasons. Businesses are scaling back investment plans to the point that only about a third of respondents to RAN’s survey report launching new production this year. When supply falls faster than demand, inflation remains elevated for longer.
Thus, we return to the «fever-inducing» treatment prescribed by the Bank of Russia. Interest rates alone cannot save the day. Banks have been compelled to lend excessively to low-profit businesses in the defense sector or adjacent industries at preferential rates, forcing them to tighten lending requirements even as the Bank of Russia cuts rates. The Bank’s surveys show a record low, with respondents noting worsened borrowing terms at -60%. The supply of investment goods—essential for production investment—has fallen 8.4% compared to Q3 2024, according to TsMAKP’s data.
Sickened by the interest rate environment and the cumulative corrosive effects of the war, the economy is now in a race to see which will fall faster: supply or demand. Recession is unavoidable in this process. Nabiullina’s insistence that further rate cuts are not guaranteed is the clearest proof that policymakers are struggling to make sense of the situation. Everything is now a matter of reaction. When all efforts toward macroeconomic «stability» are reactive, the regime is stuck in a zugzwang with regard to the economy. When the fever breaks, one can only hope they have a plan to address the hypothermia now being inflicted on households and businesses.
