The Bank of Russia lowered its benchmark interest rate again on Friday, even though the country’s own data shows the economy is shrinking. The bank, however, denied that Russia is in a recession.
The new cut reduced rates by 1 percentage point to 17%, marking the third reduction since June. High borrowing costs have helped control inflation but are also putting stress on the economy, which is still focused on war production.
Even though Russia had stayed somewhat resilient despite Western sanctions after President Vladimir Putin’s invasion of Ukraine in 2022, central bank data last week revealed the economy is weaker than expected.
A chart in the report showed GDP fell in both the first and second quarters, which meets the definition of a technical recession.
But central bank governor Elvira Nabiullina denied that Russia is officially in a recession. She pointed to other signs of strength, like employment, real income, consumer demand, and industrial production.
“We do indeed have a cooling of the economy. This is natural when coming out of overheating, when production capacity must catch up with demand,” she said at a news conference, according to Reuters.
The Kremlin has spent heavily on the war in Ukraine, keeping factories busy making weapons and offering financial incentives to attract new military recruits. This has caused labor shortages and contributed to inflation.
Because of these pressures, the central bank raised rates as high as 21% last year. Since then, cracks have appeared in the economy. Russian banks have warned about a possible debt crisis because high interest rates make it harder for borrowers to repay loans.
In June, Economy Minister Maxim Reshetnikov warned that Russia was “on the brink” of a recession. Last month, Oxford Economics also said Russia is close to a recession.
Sberbank CEO German Gref described the economy as in “technical stagnation,” adding to concerns after his previous warnings in July and August that growth was nearly zero.
Russia is also experiencing a poor harvest this year, despite being a major agricultural country, which is putting more pressure on the economy and government finances.
Revenue from oil and gas, Russia’s main source of money, has dropped due to lower crude prices and tighter Western sanctions. To cover budget shortfalls, Moscow has been using its reserve funds, which could run out later this year.
On Saturday, President Donald Trump urged NATO countries to stop buying Russian oil and suggested imposing tariffs of up to 100% on China, a major buyer of Russian crude. He said this could help end the war in Ukraine, following a meeting with Putin in Alaska last month that made no progress on ceasefire talks.
Instead, Russia increased tensions with NATO by sending drones into Poland, which were shot down by alliance fighter jets.
“China has a strong control, and even grip, over Russia,” Trump wrote on social media, adding that heavy tariffs “will break that grip.”
