Russian economy faces ‘massive structural challenges’, says Central Bank
The Russian economy facing a new “perestroika” as it is forced to adjust to life under heavy sanctions and international isolation, the country’s central bank warned on Friday.
The regulator opted to keep interest rates at 20% at a scheduled rate-setting meeting, following an emergency hike in late February in the days after Moscow launched its invasion of Ukraine and the West has imposed unprecedented financial sanctions in response.
“The Russian economy is entering a phase of large-scale structural readjustment,” the bank said in a statement. statement.
“This will be accompanied by a temporary but inevitable period of higher inflation,” he added.
Russia’s inflation rate hit its highest level in 24 years in the weeks following the invasion of Ukraine. Officials warned Against panic buying on Friday, a number of Russian stores reported shortages of basics such as sugar and toilet paper due to increased consumer demand amid rapidly rising prices.
At a news conference on Friday, Governor Elvira Nabiullina said the 20% rate hike would be reversed when economic conditions allowed.
“High interest rates are a temporary anti-crisis measure. When the situation stabilizes, rates will be reduced,” she said.
“Since early March, inflation has accelerated significantly,” the Bank said. “This translates into increased demand for a number of consumer goods due to increased uncertainty, higher inflation expectations and a weaker ruble.”
“Companies in several sectors have reported production and logistics difficulties in the context of the introduction of trade and financial sanctions against Russia. The sharp rise in uncertainty is negatively affecting the mood and outlook of people and businesses,” the Bank said.
The regulator now officially forecasts a drop in Russia’s GDP for the second quarter of the year. Analysts estimate that Russia’s economy is expected to contract by more than 10% in 2022 and the economic crisis could be the deepest Russia has seen since the collapse of the Soviet Union.
The term “perestroika” – used by the Central Bank to describe the challenge facing the Russian economy – means “readjustment” or “reconstruction” and is most closely associated with the economic reforms introduced at the end of the Soviet Union to open up and introduce market forces into the communist planned economy.
Commentators say the Russian economy could return to this period, with Western companies fleeing the country and the government considering options such as nationalization and expropriation in a bid to minimize job losses.
President Vladimir Putin warned earlier this week that Russians should be prepared for rising unemployment in the coming weeks, blame the West as well as Russian “traitors” for attacking Russia and the Russian economy.
On Friday, Putin also nominated Nabiullina for another five-year term as head of the regulator.
Western governments have frozen nearly half – some $300 billion – of the Central Bank’s international reserves, previously seen as Russia’s insurance policy against harsh sanctions. In its statement, the regulator gave the Russian government the responsibility of rescuing the national economy, saying fiscal policies – central government taxation, spending and investment – “will significantly affect the dynamics of the economy and the economy.” inflation”.
Analysts have already critical the Russian government for not announcing a major stimulus package to help support the economy. The latest initiatives outlined by the government focus on tax breaks, credit holidays and cheap loans – similar to the measures adopted during the coronavirus pandemic.
Nabiullina warned the government against introducing more restrictive measures, such as price controls.
“There is enough staple food in stock and production is increasing. Once this period of high demand passes, the prices of these goods may even start to fall,” she said on Friday.
“It is important not to introduce price controls. This is an artificial measure that will not solve the deficits. Administrative measures will slow the economy’s adjustment to new conditions.