A new wave of COVID-19 has started to rage across Russia and last week authorities in Moscow decided to impose the most severe restrictions since the first weeks of the pandemic in the spring of 2020. In an aggressive move Amid rising inflation, the central bank also raised its key rate to 7.5%. It is not yet clear how hard these developments will hit the Russian economy, but the specter of stagflation is becoming increasingly visible.

• On Friday, for the second day in a row, Russia set a 24-hour record for new coronavirus infections and deaths. Official figures show 37,141 new cases (against 36,339 the day before) and 1,064 deaths (against 1,036). Moscow has recorded the highest number of cases and infections have risen sharply in the capital this week, from 5,847 on Wednesday to 7,897 on Thursday, then to 8,166 on Friday. The current record for single-day infections in the city is 9,056, set on July 18. Mayor Sergei Sobyanin warned that this figure could be exceeded in the coming days.
• The reliability of official figures remains a open question, but it is clear that the authorities’ new willingness to impose unpopular restrictions portends a significant deterioration of the situation.
• First, on Wednesday, President Vladimir Putin announcement that October 30 to November 7 would be non-working days in Russia, with staff still receiving their salaries. Russia was already due to spend a long weekend thanks to National Unity Day on November 4 and adding three more days to the public holidays will not significantly affect economic activity, several economists told RBC. In May, when there were similar additional non-working days, many companies continued as usual, experts recalled.
• While the non-working days Putin announced were not intended to force the shutdown of the service sector, the measures announced a day later for Moscow and the Moscow region look much more like a lockdown for businesses. Moscow Mayor Sobyanin on Thursday issued a decree aimed at to prohibit from October 28 to November 7, the governor of the Moscow region, Alexei Vorobyov, quickly followed suit. Only four areas are exempt: the sale of food, the sale of drugs, take-out and delivery services to cafes and restaurants, and online retailing. Large-scale cultural, entertainment, sporting, promotional and similar events are prohibited. After the lockdown, from November 8, access to events involving more than 500 people will be via QR codes issued to vaccinated participants and those with a recent negative PCR test. Theaters and museums will resume work but will have to operate at 50% capacity and access will also be limited to those with QR codes. Apart from a fairly gentle “stay at home” regime for the vulnerable and those aged 60 and over, residents of Moscow will face no restrictions on their movement within the city.
• In last year’s closures, most regions quickly followed Moscow’s lead, implementing measures similar to those introduced in the capital. Today the restrictions are imposed more selectively, but that doesn’t necessarily mean they are softer in places further from Moscow. For example, more than 50 of Russia’s 85 regions require visitors to have a QR code to visit public spaces, which is not yet required in the capital.
• The Russian economy is in a difficult situation. As in the rest of the world, the pace of economic recovery is slowing: in August, growth fell to 3.7% year-on-year, from 4.7% in July and 8.9% in June. New restrictions only complicate the picture. Sova Capital analysts say the foreclosure of businesses in Moscow and the Moscow region alone could cost Russia 0.25 to 0.3 percent of its annual GDP growth. At the same time, inflation continues to hit new highs. Data released Wednesday by Rosstat shows that the price increase has reached an annual rate of 7.78%, the highest level since 2016. The danger of global stagflation, under debate by investment bankers for at least the last month, has also been recognized by the Russian Ministry of Finance last Thursday.
• Friday the Central Bank raised its key rate for the sixth time this year, rising 0.75 percentage points to 7.5 percent, and indicated that further rate hikes were possible. The rise was higher than expected by many analysts, whose forecasts were broadly split between increases of 0.25 and 0.5 percentage points. The main explanation for the steeper-than-expected rise is that the regulator now views COVID-19 restrictions as a contributing factor to inflation, Central Bank Chief Elvira Nabiullina said at a conference on Friday. Press. In spring 2020, containment made it possible to fight inflation by crushing demand. But subsequent experience has shown that demand is less and less impacted by the restrictions, while supply should again be held back by the suspension of activities. As a result, Nabiullina explained, the restrictions fuel inflation.

Why the world should care: The central bank’s decision makes it clear that inflation is the biggest threat facing the Russian economy today. The impact of the new COVID-19 restrictions on economic growth and the possible emergence of stagflation will largely depend on how long these measures are in place. Moscow’s first lockdown, at the end of March 2020, was initially imposed for a week, but ultimately lasted for more than two months.