With the ongoing uncertainty around Elvira Nabiullina and the regime’s approach to the Bank of Russia, the fate of the institution and its policies has become a proxy for two opposing forces undermining economic stability: manual control and “automatic” inertia. Manual control is nothing new in Russia. Individuals with the right patrons, titles, or mandates have long exerted outsized influence on policy design and implementation. Russia’s bureaucratic institutions are both perpetually weakened and remarkably durable. They outlast any given policy “curator’s” efforts to make a problem go away for the Kremlin. But these efforts stand in contrast to what makes an economy dynamic—its capacity to allocate resources, invest, function, and self-correct. Political interference isn’t always negative, but when it is unsystematic, nakedly political, and chaotic, it creates as many problems as it solves, or more.
One of the lingering side effects of the war has been to make GDP growth and structure more dependent on investment. The fact that investment levels remain elevated compared to pre-invasion norms makes clear that these investments have done precious little to lift productivity. In the case of military spending, they have even bled the country’s productive capacity over time. That is why slowdowns in investment in sectors not subject to manual control merit close scrutiny. The economy is now even more exposed to high interest rates set by the Bank of Russia than usual—a situation that is more manageable when fiscal and other policy levers are aligned toward common goals such as growth, price stability, and development.
For the first half of the year, investment in commercial real estate is down 40% year-on-year and roughly half the levels seen in 2023−2024. It remains higher than pre-2022 averages, but the market is consolidating as businesses sell off non-core assets. Households appear to be borrowing more. In Q1, the debt burden of the average Russian declined slightly, from 29% to 27% of annual household income, while consumer loans rose 27%, likely aided by the gradual decline in rates. More worrying is that delinquent debts continue to climb, with overdue mortgages now at post-2021 highs. Some 11.6% of all corporate loans are now delinquent, concentrated among small businesses and rate-sensitive sectors such as construction. Business owners’ real incomes fell 4.2% in Q1. If household real incomes do not pick up, the expansion in borrowing will likely become a headwind for consumption later this year or early next, much as it did between 2011 and 2013. All of these factors are consequences of changes to the economy that preceded the invasion.
The largest structural shift in Russia’s growth during late Putinism came from the mortgage subsidy scheme launched in 2020. Long delayed by bureaucratic deadlock—despite officials having pushed for a housing boom as part of Putin’s 2012 re-election promises—the scheme shifted the economy’s exposure to interest rate changes. Buying a new home sets off a consumption cycle that can last for months or even more than a year, covering new appliances, furniture, remodeling work, and the replacement of fixtures, plumbing, radiators, or boilers. The subsidies, and their broad repeal in 2024, created a bottleneck with no easy exit. Since COVID, real incomes have risen perhaps 25−30% (though this remains somewhat debatable), while home prices have roughly doubled, making housing less accessible than it was before the pandemic. Market mortgage rates now stand at 20−21%. Only a sharp collapse in interest rates could meaningfully change this, especially since banks are increasingly exposed to delinquent credit in their portfolios.
The economic leverage of these policies did not overhaul the economy. Construction’s share of net investment by sector was 3.6% in 2018, when inflation hit post-Soviet lows, and has since risen to 4.1−4.3% following the invasion, boosted by wartime needs. Yet the policies’ effect on the broader civilian business cycle has been significant. Moscow has become a bubble of spending while much of the rest of the country is in recession. The recovery in demand for market-rate mortgages this year has been notable, but it is also driven by expectations that further rate cuts will allow buyers to refinance. Hence the intense focus on the Bank of Russia these days. Officials and observers alike struggle to imagine any meaningful set of fiscal policies or shifts in the war that could have comparable structural effects to changes in interest rates.
Nabiullina’s decision to cut rates by a mere 25 basis points to 14.25%—well short of market hopes for a larger move—is a distress signal. Big business has been pressing regulators for a full 1% cut and a path toward rates below 10% by year-end. Sustaining investment levels has become the highest priority and, by default, the most important metric for reviving GDP growth. The modest rate cut amounts to malicious compliance: the Kremlin cannot credibly claim the Bank is ignoring its concerns, yet it also cannot ignore that the move will not deliver the swift reductions in borrowing costs needed to make other economic maneuvers less painful later this year.
The cost of capital is a core piece of infrastructure sustaining the “automatic” functioning of any economy. It provides a degree of self-regulation that central banks, by ideological preference for decades, are supposed to exercise independently of the political cycles that govern fiscal policy. What was once speculation and concern is now evident: interest rates have become another domain of manual control. Businesses will undoubtedly be unhappy with the small cut, but they will also note that pressure can have an effect. Elsewhere, manual control will remain the dominant way major problems are addressed. However, with so much now riding on the ability to refinance at lower rates and recapture some of the tailwinds from the nominal income gains after 2022, the state’s capacity to intervene is paradoxically weakening. If it were not, the Iron Lady would not hold so much power to sink the best-laid plans.
