Russia: Policy Rate Raised to 18%

As of today:

For comparison, here is the y/y (official) inflation rate (through June).

 

With the policy rate at 18%, and y/y inflation at 8.6% (through June), we have in essence a contractionary monetary policy. The ex post real rate was 7.4% in June. Assuming adaptive expectations, the ex ante real rate for August onward is about 9.4%…(Central Bank of Russia projects 9% inflation in July).

The combination of extremely expansionary fiscal policy (with heavy emphasis on war industries) plus supply shocks (sanctions on critical inputs, emigration, conscription) requires tight monetary policy in order to keep inflation under control.

For more on the extent to which Russia is running a war economy now, see BOFIT’s Heli Simola “Military dominance increases imbalances in the Russian economy” (May 2024). Two graphs:

See also my estimates of the growth of the non-military economy, here.

It will be interesting to me to see how long the economy can withstand 9% or so real rates without experiencing a recession (or without the government sacking the Central Bank governor).

 

 

 

 

17 thoughts on “Russia: Policy Rate Raised to 18%”

  1. pgl

    With the policy rate at 18%, and y/y inflation at 8.6% (through June), we have in essence a contractionary monetary policy. The ex post real rate was 7.4% in June. Assuming adaptive expectations, the ex ante real rate for August onward is about 9.4%…(Central Bank of Russia projects 9% inflation in July). The combination of extremely expansionary fiscal policy (with heavy emphasis on war industries) plus supply shocks (sanctions on critical inputs, emigration, conscription) requires tight monetary policy in order to keep inflation under control.

    So Russia is having its Reagan-Volcker moment.

    Of course the world’s most incompetent consultant (Steve Koptis) will not understand this and claim that inflation must be 16% as it is not possible in his weird mind that real rates could be more than 2%. Then again Stevie thinks nominal events matter to real outcomes because of the Real Business Cycle. Even JD Vance is not THAT dumb!

  3. Macroduck

    There are a number of channels through which rate policy operates. Di we know ow the extent to which the Russian government t is circumventing some of the effects through some channels?

    Putin not admit it, but he wants to suppress personal consumption as long as the war continues. Reduced personal consumption is needed to free up resources for the war effort.

    Foreign trade is very largely denominated in currencies other than Russia’s, so the exchange rate is probably not that big a deal. If credit is directed to sectors which keep the lights on – metaphorically* – then other sectors can do without. That’s the decision Putin made when he decided to continue with his criminal invasion of Ukraine under sanctions.

    The point I’m trying to make, and doing clumsy job, is that interest rates are more a symptom of Russia’s economic problems than a cause. The cause is Putin’s war. High interest rates are merely an adjustment mechanism between various economic ills caused by the war.

    So unless Putin is stupid, or looking for a scapegoat, Nabiullina’s job should be safe. She at least has a grasp of the technocratic details, and can avoid making things worse.

    1. Ivan

      Ukraine has been brilliantly taking out Russian air defenses with drone swarms and HIMARS missiles. Their attacks on airfields and petroleum infrastructure has become remarkably successful – just in time for the arrival of F16 jets. Those will still have to be kept far behind the front lines, but can become a substantial boast to the missile defense and missile attack forces.

  5. pgl

    “Military dominance increases imbalances in the Russian economy” is an interesting read. This paragraph would have been more useful if these nominal increases were inflation adjusted:

    ‘Russian government spending soared after the invasion of Ukraine. In 2022‒2023, Russia’s consolidated budget expenditure (which includes the federal budget, regional budgets and extra-budgetary funds) increased on average by 15 % a year in nominal terms. The current budget plan expects further rapid growth in spending. Russia has ceased to publish detailed information on realized budget spending, but the Stockholm International Peace Research Institute (SIPRI),[1] for example, estimates that Russia’s military spending (in nominal ruble terms) rose by nearly 40 % a year during 2022‒2023. Growth in military spending this year is set to outpace overall spending growth by an even larger margin as government funds continue to be redirected to supporting the war effort (Figure 1).’

    The first figure (actually labeled Chart 1) shows the nominal growth rates of both total government spending and military spending. Given Russia’s rather high and variable inflation rates, the reader is left to wonder what these changes look like in inflation adjusted terms. Or even spending as a share of GDP. I get this kind of work is hard but the contributions of their research is really promising.

  6. pgl

    https://fred.stlouisfed.org/series/fedfunds

    The US Federal Funds rate actually exceeded 19% back during that Reagan-Volcker tug of war. Russia’s situation today is similar.

    Memo to the troll who does not know the meaning of exogenous or endogenous or Real Business Cycle theory but makes up dumb terms like “suppression”. Expected inflation back then was no where close to 17%. And real interest rates were a lot higher than 2%.

  7. Macroduck

    Climate change stuff – Atlantic meridional overturning circulation due to tip at mid-century:

    https://www.nature.com/articles/s41467-023-39810-w

    Not a full shutdown of the AMOC, but more than the gradual weakening in circulation reported so far. Tipping would mean far less southern temperate-zone water circulating into the North Atlantic. A simple way to understand what’s at stake is that the AMOC has been a steady feature of the Holocene epoc; human civilization has never existed without the AMOC.

    Here’s a review of the likely consequences of AMOC tipping:

    https://www.theguardian.com/environment/2024/feb/09/atlantic-ocean-circulation-nearing-devastating-tipping-point-study-finds

    From the Guardian article:

    “Sea levels in the Atlantic would rise by a metre in some regions, inundating many coastal cities. The wet and dry seasons in the Amazon would flip, potentially pushing the already weakened rainforest past its own tipping point. Temperatures around the world would fluctuate far more erratically. The southern hemisphere would become warmer. Europe would cool dramatically and have less rainfall. While this might sound appealing compared with the current heating trend, the changes would hit 10 times faster than now, making adaptation almost impossible.”

    Those refugees to Europe from Africa’s environmental ravages? Oops, bad choice. The flow of economic refugees from South and Cental America to the North? You ain’t seen nothing. Australian rules football? Not for much longer.

    If you’re thinking of voting for Trump, remember – Democracy isn’t the only thing at stake.

    1. James

      Macroduck to me – not only our voting rights and the ability to choose our reproductive healthcare is at stake in this election but what kind of world our children will live in – trump has promised to eliminate any spending on renewable energy and to rescind Biden/Harris Paris Climate Agreement on CO2 emissions.
      Can any journalist in the corporate media (NY Times, WP, CNN, etc. ) step back from the day-to-day horse race election reporting and do a report on what Donald “Climate Change is a Hoax” Trump admin catastrophic policy will mean for our future? https://www.wired.com/story/project-2025-wants-to-propel-america-into-environmental-catastrophe/
      (BTW – Putin is not only destroying Russia economically – he is also destroying the working age population – almost 600,000 and counting causalities and 1 to 1.5 million have fled the country. – Putin puppet Trump and MAGA think Putin is a genius.)

  8. pgl

    Trump brags about his intent to end our democracy:

    Former President Donald Trump told Christians on Friday to vote “just this time” and claimed they “won’t have to do it anymore” after the election in November. “Four more years, you know what? It’ll be fixed, it’ll be fine. You won’t have to vote anymore,” the GOP presidential nominee told the crowd at the conservative Turning Point Action event in Florida. He later continued, “Get out. You gotta get out and vote. In four years, you don’t have to vote again. We’ll have it fixed so good, you’re not gonna have to vote.”

    https://www.msn.com/en-us/news/politics/trump-tells-crowd-they-won-t-have-to-vote-again-after-election-in-bizarre-remarks/ar-BB1qIr9B?ocid=msedgdhp&pc=U531&cvid=69d7a9153e054bc8962a775b0eefa633&ei=25

      1. pgl

        He also told these “Christians” the following “I’m not a Christian”. First true thing he has said.

        And those in the crowd are not Christians either.

    2. pgl

      Check out Kevin Drum’s post on this – and don’t skip the comments. Kevin is giving Trump the benefit of the doubt but his readers are not.

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