Moscow took sharp action on Friday to curb inflation, fearing the effects of higher war spending in Ukraine and a weakening Russian ruble.
Russia’s central bank took the unexpected step of raising its benchmark interest rate by a full percentage point, to 8.5 percent from 7.5 percent. It was the first big increase in more than a year, and the bank warned that further increases were likely.
“This is a surprise and on the face of it shows more concern in the central bank about inflation and how the economy is doing than we appreciate,” said Robert Kahn, head of the Geoeconomics Team at Eurasia Group, a New York-based risk analysis firm. “This suggests that the war is proving to be more disruptive to economic activity and driving inflationary pressures.”
While the idea that sanctions will bring Russia’s economy to a standstill has been lost, the effects of the war are still affecting the economy in other ways including higher military spending, labor shortages and a steadily worsening trade balance, experts say.
Elvira Nabiullina, the governor of the central bank, made only oblique references to the war in announcing the increase. “Companies will not immediately open new production lines and find more labor for them,” he said. “When demand begins to consistently outstrip the ability to increase supply, prices will always rise.”
The bank predicts that inflation will reach 5 percent to 6.5 percent this year, lower than the end of last year, but more than the 4 percent annual target.
Experts point to several factors at play. First, the ruble has weakened sharply against other currencies in the weeks since mercenary commander Yevgeny Prigozhin led his Wagner Group in an anti-government rebellion in late June, rising to more than 90 to the US dollar from about 83. Because Russia imports more goods, the weaker ruble pushes up prices.
It’s especially problematic for Russia because President Vladimir V. Putin has linked many social spending programs to the rate of inflation. “It’s kind of a key plank of Putinism that pensions and other payments will be kept in line with inflation,” said Charles Lichfield, deputy director of the Atlantic Council’s GeoEconomics Center. “Maybe they can’t handle it.”
No one is sure how much the government has spent on the military, for everything from new armaments to higher paychecks to hundreds of thousands of newly recruited soldiers. One-third of government spending that goes to defense and security-related matters is now classified, but there is no doubt that such spending is increasing.
Mr. Putin’s government has poured billions into producing weapons and materials for Ukraine’s protracted war. It also showered the country’s citizens, including residents of the occupied regions of Ukraine, with subsidized loans and other social payments. At the same time, wages and compensation payments to Russian fighters in Ukraine have pushed up average wages, fueled inflation and left many civilian industries struggling to attract workers.
Labor shortages were exacerbated by the exodus of hundreds of thousands of working-age Russians to protest against the war or to avoid mobilization. Tens of thousands more died on the battlefields of Ukraine, according to some estimates.
At the same time that it makes more expenses, the government earns less from energy exports, although it remains important. In June the Central Bank reported the first negative trade balance since 2020.
In addition, the Russians have now moved about $40 billion of cash holdings overseas since the war began in February 2022, Mr. Lichfield said. After the attack in Ukraine, the government limited the amount of foreign currency people could move abroad, but controls have been gradually eased.
Mr. Lichfield said the government’s current policy of spending more money than it earns highlights the potential for higher inflation. “The Russian government is afraid it’s going out of control because it’s pumping money into the economy,” Mr. Lichfield said.
Overall, the central bank said the economy will grow to 2.5 percent this year, effectively recovering the “pre-crisis” level of activity, a euphemism for the period before the full invasion of Ukraine. Although the announcement of Ms. Naiullina’s growth forecast also contains caution.
The Russian economy could go into overheat, he said, adding that “our goal is not to allow that risk.”