Vladimir Putin is driving the Russian economy dangerously red hot

A view shows a billboard, with the word “Russia”, the message “Happy New Year” and a QR code that is a gateway to a website of supporters of jailed Russian opposition politician and Kremlin critic Alexei Navalny, on the roadside in Moscow (Reuters) (STRINGER/)

The history of inflation in Russia It is long and painful. After the revolution of 1917, the country had to face years of rising prices and, later, sustained pressure on prices in the early years of the government of Joseph Stalin. The end of the Soviet Unionthe global financial crisis of 2007-09 and the first invasion of Ukraine by Vladimir Putin In 2014 they also brought problems. At the end of 2023, as the second anniversary of the war approaches in UkraineRussian prices accelerate again, although inflation decreases in other countries.

According to figures published on December 8, Inflation in November was 7.5% year-on-year, compared to 6.7% the previous month. The central bank had to face a rally in early 2022, shortly after Russia would invade Ukraine for the second time. Now, however, officials fear they are losing control. At its last meeting, the bank raised interest rates by two percentage points, double what was expected. At the next meeting, on December 15, a similar increase is expected. However, most analysts predict that the inflation continues to rise.

Russian inflation in 2022 was due to the weakness of the ruble. After the invasion of Putin, the currency fell 25% against the dollar, which raised the cost of imports. This time currency movements are playing a minor role. In recent months the ruble has appreciated, partly because authorities introduced capital controls. Price inflation of non-food consumer goods, many of which are imported, is in line with the pre-war average.

However, if one looks more closely at the war economy of Putin, it is clear that it is dangerously overheating. Inflation in the service sector, which includes everything from legal advice to restaurant meals, is exceptionally high. The cost of a night in Ritz-Carlton of Moscownow called Carlton After the withdrawal of its Western sponsors, it has gone from about $225 before the invasion to $500. This suggests that the cause of inflation is internal.

Many economists blame public spending, which is skyrocketing as Putin try to defeat Ukraine. In 2024, defense spending will almost double, reaching 6% of GDP, its highest level since the collapse of the Soviet Union. In view of the upcoming elections, the government is also increasing social assistance. Some families of soldiers killed in combat receive compensation equivalent to three decades of average salary. The figures of Ministry of Finance Russian suggest that fiscal stimulus is currently equivalent to about 5% of GDP, a larger boost than that applied during the COVID-19 pandemic. Covid-19. This, in turn, is driving up inflation.

This, in turn, is raising the country’s growth rate. Real-time economic data published by the bank Goldman Sachs They point to solid growth. JPMorgan Chase, another bank, has raised its GDP forecast for 2023, from a decline of 1% at the beginning of the year, to 1.8% in June and more recently to 3.3%. “Now we say with confidence that it will exceed 3%,” he recently boasted Putin. Predictions of a collapse of the Russian economy – made almost unanimously by Western economists and politicians at the beginning of the war Ukraine– have turned out to be flatly wrong.

The problem is that the Russian economy cannot support such rapid growth. Since the beginning of 2022, its supply has been drastically reduced. Thousands of workers, often highly skilled, have fled the country. Foreign investors have withdrawn direct investments worth $250 billion, almost half of what they had before the war.

Red-hot demand collides with this reduced supply, resulting in rising prices for raw materials, capital and labor. The unemployment rate, less than 3%, is the lowest ever recorded, encouraging workers to demand much higher wages. Nominal salaries grow around 15% annually. Companies pass these higher costs on to their customers.

Rising interest rates could put an end to this demand, preventing inflation from rising further. The recovery in oil prices and additional capital controls could boost the ruble and reduce the cost of imports. But all this faces an immovable force: the desire to Putin to win in Ukraine. With great financial capacity, you can spend even more in the future, which portends even faster inflation. As on so many previous occasions, Russia There are things more important than economic stability.

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Source-www.infobae.com