Inflation Surge in Russia Puts Kremlin and Central Bank on a Collision Course

A growing divide between the Kremlin and the nation’s central bank has come to light as a result of rising inflation and a depreciating ruble in Russia.

In an effort to stop the rapid depreciation of the ruble, which on Monday hit a 17-month low of close to 102 to the dollar, the Central Bank of Russia (CBR) increased interest rates by 350 basis points to 12% on Tuesday.

Maxim Oreshkin, the economic adviser to President Vladimir Putin, published an opinion piece in which he claimed that the central bank has all the instruments it needs to restore normalcy despite the recent acceleration of inflation and the declining ruble.

Since inflationary pressure is intensifying—current price growth over the past three months has averaged an annualized 7.6% on a seasonally adjusted basis, while core inflation over the same period increased to 7.1%—the Bank said its emergency rate hike on Tuesday was intended to limit price stability risks.

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Russia’s Inflation and Currency Instability Factors

The underlying inflationary pressure is amplified when domestic demand continues to grow faster than output can keep up, and this has an effect on the dynamics of the ruble’s exchange rate because it increases import demand.

In an effort to lessen volatility last week, the central bank put a hold on purchases of foreign currencies on the domestic market until 2024. However, this did not stop the ruble’s slide. When oil and gas export income drops, Russia frequently sells foreign currency to make up the difference and buys when it has a surplus.

Prior to the Kremlin’s intervention, the Bank of Russia attributed the country’s rising inflation and currency instability to the country’s declining trade surplus, which decreased by more than 85% year over year from January to July.

The chairman of the Duma Committee on Financial Markets, Anatoly Aksakov, claimed on Monday that the state controls the exchange rate for the ruble.

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Source: www.cnbc.com/2023