Op-ed by Alexander Kolyandr, Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA) and former banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.
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The government has recognized how close Russia is to stagnation, with the Economic Development Ministry this month cutting its GDP growth expectations to 1% this year (down from 2.5%) and 1.3% next year (down from 2.4%). Even these reduced predictions look optimistic — they are based on assumptions of stable oil prices and the absence of significant sanctions, both of which look overly optimistic (The US administration imposed sanctions on two major Russian oil companies on October 22.)
The International Monetary Fund (IMF) has also cut its forecasts for Russia, putting it at odds with the rest of the global economy and most countries, which saw a bump-up in expected growth. The Washington-based fund reduced its expectation of Russian growth from an already measly 0.9% in July’s forecast to 0.6%.
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Russia’s borrowing costs are likely to stay higher, for longer. That’s because high inflation and weak growth are structural, not temporary.
Rapid wage expansion due to demographics and the war, coupled with stagnant growth, is one factor. Increasing VAT to cover military expenditure is another, as it will trigger a one-time spike in inflation, further putting the brakes on rate cuts.
As a result, businesses will have to struggle for longer, and government borrowing will cost more. The result will be a period of almost zero growth, high inflation, and interest rates — precisely the stagflation scenario this author has been warning about for more than a year.
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Before tankies cry mad, 'But Cepa is bad and biased', it is noteworthy that the post 'The Final Split: How Europe Broke Apart Over Gaza' (the second post published prior to that one) has been written by a Cepa-intern published in Fairobserver.