- Russians are spending money freely, with consumption per capita surging over 20% from 2021 to 2023.
- The spending comes on the back of an overheated economy, with growth driven by wartime state spending.
- Russia's central bank has hiked rates to 18% to combat inflation of more than 9% annually.
Russia's economy is booming, and some people are spending generously, sending prices up.
Russia posted 3.6% GDP growth last year. The unemployment rate hit a record low of 2.6% in April, as men continued heading to the war's front amid a brain drain. The labor crunch has driven up wages, contributing to high inflation running over 9% on an annual basis — well above the official 4% target.
On Friday, the Russian central bank warned — yet again — of an overheating economy when it hiked rates from 16% to 18% in an attempt to rein in price gains.
"The GDP growth rates remained high in 2024 Q1 and Q2, while inflation was accelerating. This suggests that overheating in the economy has remained considerable," Elvira Nabiullina, Russia's central bank governor, said on Friday during her rate-hike announcement.
Despite sweeping sanctions over its full-scale invasion of Ukraine in February 2022, Russia's economy hasn't broken down and even appears resilient, as it's now being driven by wartime state spending on military activities and subsidies.
Russians are traveling and spending on culture and hotels
The rate hike from Russia's central bank has come amid a spending boom in the country, even amid the war and Western sanctions, as the Financial Times reported on Friday.
Overall, consumption per capita has increased by more than 20% from 2021 to 2023, with spending on tourism a standout, surging more than 90%, according to the FT's analysis of official data. Spending on culture, hotels, transportation services, and personal services has also jumped.
A resident in Moscow told the FT that her neighbor had been showing off photos of a pet lion.
"Everyone who is upper-middle class, they're just enjoying a really good life," Sergei Ishkov, a Moscow investor and entrepreneur, told the outlet.
"Consumption is booming due to a combination of massive budget spending and labor force shortages leading to strong wage pressures," Bartosz Sawicki, a market analyst at the fintech Conotoxia, wrote in a Friday note.
But Sawicki added that military spending, about 7% of GDP, was leading to "serious macroeconomic imbalances."
Russia's central bank may hike rates again if necessary
Nabiullina said on Friday that Russia's GDP would grow 3.5% to 4% this year from a year ago. But next year, it's likely to slow to 0.5% to 1.5% year-over-year growth.
She added that the Russian central bank would keep its key interest rate high for as long as needed to bring inflation back to its target. If necessary, it could even impose more rate hikes to reduce economic risks.
"Labour force and production capacity reserves have been almost exhausted," Nabiullina said. "Shortages of these resources might cause a situation where the economic growth will be slowing down despite any attempts to boost demand."
Furthermore, any attempt to stimulate demand would only stoke even more inflation. That could create "a scenario of stagflation that could only be stopped by way of a deep recession," she warned, explaining the central bank's steep rate hike.
The central bank next meets on September 13.
Watch: Invading Ukraine is making Russia rich
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