Russia's Economy Shaken by War... Pressure on Central Bank to Cut Interest Rates

January Fiscal Deficit 31 Trillion
Western Countries, Impact of Sanctions on Russian Crude Oil

[Asia Economy Reporter Kwon Haeyoung] As the one-year anniversary of the Ukraine invasion approaches, the Russian government, facing a deteriorating economic situation, is pressuring the central bank to cut interest rates. After last year's growth rate turned negative, the plan is to lower rates to stimulate the economy.

On the 7th (local time), Bloomberg cited a Russian official saying, "The Russian government wants a clear signal at the first central bank board meeting of the year on the 10th that the benchmark interest rate could be cut by the end of the year."

Elvira Nabiullina, Governor of the Russian Central Bank, holds the view that it is premature to ease monetary policy due to high inflation in Russia. Previously, the Russian Central Bank cut the benchmark interest rate several times from 20% in February last year to the current level of 7.5%. It is highly likely that the rate will be kept at 7.5% at the board meeting on the 10th as well.

Bloomberg reported, "Senior Russian government officials believe the central bank is overly pessimistic about the economy," adding, "The Russian government claims that the economy is not causing price (inflation) pressures."

The reason Russia is pressuring the central bank to cut interest rates appears to be the rapidly worsening economic situation and national finances since the Ukraine war. Russia's economic growth rate recorded -2.2% last year, when it invaded Ukraine. The International Monetary Fund (IMF) expects this year's growth rate to be around 0.3%.

[Image source=Yonhap News]

Whether the plan to cut interest rates will succeed is questionable. The possibility of reviving the economy arises only if fiscal spending is also loosened along with the rate cut, but Russia's fiscal situation has been worsening recently. The fiscal deficit is increasing due to Western sanctions on Russian crude oil.

According to the Russian Ministry of Finance, the fiscal deficit in January this year was 1.76 trillion rubles (about 31.2 trillion won). This is 60% of the annual fiscal deficit Russia initially expected for this year. This is due to a 46% plunge in oil and gas revenues to 426 billion rubles (about 7.5 trillion won) compared to the same period last year. Russia was hit directly by the price cap on Russian crude oil and the reduction in natural gas exports implemented by the European Union (EU) and the Group of Seven (G7) countries since early December last year. On the other hand, defense spending has increased significantly due to the impact of the Ukraine war. Government spending in January alone rose 59% from a year earlier to 3.12 trillion rubles (about 55 trillion won). The Russian government has decided to increase defense spending to 3.5 trillion rubles (about 62 trillion won) this year.

With its financial resources completely blocked, Russia is in a critical situation. Last month, Russia sold 385 billion rubles (about 6.8 trillion won) worth of yuan and gold from the National Welfare Fund, and plans to issue government bonds worth 800 billion rubles (about 14.2 trillion won) in the first quarter of this year. It is using emergency funds stored in the treasury and borrowing money to finance the war.