**Russia: Economic Inflation and Its Impact on Russians’ Daily Lives**
The Russian economy is currently rocked by unprecedented inflation, with more far-reaching consequences for the population than expected. While Americans have been complaining about inflation for several years, price increases in Russia are staggering in comparison. Butter, some meats, and onions are about 25% more expensive than they were a year ago, according to official data. Some supermarkets are even keeping butter under lock and key, suggesting cases of theft of these commodities that have become precious to many Russian households.
The general inflation rate is around 10%, well above the Central Bank’s forecasts. This inflation is fueled by rapidly rising wages, a direct result of the Kremlin’s huge investment in military industries and the sending of millions of men to fight in Ukraine. During wartime, companies outside the defense sector cannot compete for workers without offering much higher wages, which translates into higher prices. Thus, the vicious circle continues its upward spiral.
According to Alexandra Prokopenko of the Carnegie Russia Eurasia Center in Berlin, “Prices rise because of the war. Demand in the economy is distorted in favor of non-productive spending. Wages rise because employers have to compete for workers.”
Other economists call this situation growth without development. National income increases, but there is no overall improvement in health, education, technology, and infrastructure.
In an effort to dampen inflation, the Central Bank raised its key interest rate in October to a record high of 21%. However, an influential group of Russian economists recently said on Telegram that “increased inflationary pressure will not only persist but may even increase.”
Russian President Vladimir Putin said earlier this month that the Russian economy needs nearly a million new workers because of an unemployment rate of just 2.4%, or “virtually no unemployment,” as he put it.
Russia’s labor shortage has become a real obstacle to economic growth. High labor costs and interest rates are strangling businesses. Russia’s Alfa Bank revealed last month that “businesses are already struggling, and with the [Central Bank] rate raised to 21%, it will become even more difficult, so we do not rule out the risk of increased bankruptcies.”
According to Alfa Bank and most economists, the Central Bank rate is set to hit 23% next month. At the heart of this overheating is Kremlin spending. The military budget will increase by about a quarter in 2025, accounting for a third of all government spending and 6.3 percent of gross domestic product. Adding in other so-called “national security” spending, that’s 40 percent of the federal budget.
While Russia does not appear to be on the brink of economic collapse, some analysts are observing that a simmering crisis is looming. With a steady stream of commodity revenues, a capable economic team, and increasing repression at home, the Kremlin can continue to fund its war effort for the foreseeable future.
The International Monetary Fund projects Russian GDP growth of 3.6 percent this year, compared with its forecast of 2.8 percent for the United States.
International sanctions have not dealt a fatal blow. Russia is circumventing sanctions by importing Western technology through third countries, particularly in Central Asia and Turkey. Despite these Western sanctions, EU imports from Russia totaled nearly $50 billion last year.
The Russian state continues to benefit from oil and gas exports to India and China, largely through a fleet of clandestine ships that evade the $60-a-barrel cap imposed by Western governments. Domestically, state revenues are rising, including from sales taxes as Russians spend more.
According to Russia’s Federal Statistics Service, inflation-adjusted incomes rose 5.8% last year as companies sought to hire.
For millions of Russians working overtime, particularly in IT, construction and manufacturing, times are good. The wealthy who used to spend much of their money at European resorts are now spending their money in Russia, further boosting the economy.
Families also benefit from higher wages and bonuses paid to men recruited into the armed forces. Russian contract soldiers receive nearly three times the average wage and a signing bonus that can range from $4,000 to $22,000.
This situation highlights the economic challenges Russia faces today and raises questions about the future of its economy. Inflation, inflationary pressure, labor shortages, and government spending are all challenges that will require creative and effective solutions to ensure the country’s long-term financial and social stability.