Russia’s sky-high interest rates will struggle to fight inflation in the sanctions-stricken economy, top Russian bank CEO says

The Kremlin in Moscow.

Russia’s best bet to rein in inflation might not do much good amid stiff sanctions by the West, one of the country’s top bankers said.

“In the context of high military expenditures and sanctions, an instrument like the key interest rate may not be fully effective in managing inflation,” Andrei Kostin, head of Russian bank VTB, told Reuters.

The chief of VTB, Russia’s second-largest bank, delivered the remarks after the Russian central bank raised its benchmark interest rate to 21% in October. High borrowing costs are the central bank’s leading plan to curb stubborn price growth, with Russia’s annual inflation rate approaching 8.7%.

Although that’s the highest benchmark interest rate since 2003, state loan subsidies, high war spending, and the restrictive impacts of Western trade curbs have blunted the impact of central bank action, Kostin said.

Tighter policy instead seems to be making Russia’s business leaders increasingly disgruntled. Kostin cautiously criticized the central bank’s policy, suggesting that current inflation doesn’t require the benchmark borrowing rate to be as tight as it is.

“I am, of course, not as much of a monetarist and believe that an inflation rate of 8.5% is not so critical for Russia, it could be tolerated,” he said, echoing an argument made by a recent Western think-tank report.

But the central bank has stuck with its policy approach so far, trying to counteract price hikes that have trickled down to even the most basic food items. An acute labor shortage and the Kremlin’s commitment to increase defense spending to 13.5 trillion rubles offer the bank no reprieve.

Industry heads fear broad consequences if the monetary officials stick to their hawkish stance. Critics have warned of stifled arms exports and rising stagflation risk, a fate that could be worse than recession for many economies.

The sharpest rebuttal came from the country’s biggest industrial lobbyist, the Russian Union of Industrialists and Entrepreneurs. According to Carnegie Politika, it developed a proposal to give the government some oversight of monetary policy, pressuring the central bank to defend its approach.

Bank of Russia governor Elvira Nabiullina said last month that inflation was approaching a “turning point” that might allow interest rate policy to ease next year, but Kostin predicted that the nation’s benchmark interest rate would still rise to 23% before the end of 2024.

Though Kostin doesn’t expect widespread bankruptcies, he estimates that overall lending growth will slow to 10% next year, down from 20%. VTB’s profits would slide by 27% in such an environment, he added.

The bank chief also predicted a slowdown in Russia’s GDP growth to 1.9% next year, down from this year’s government-estimated 3.9% expansion.

“It is impossible for the economy to go through such events without consequences. But the country has been living for three years, there is economic growth, and overall a healthy economy,” he told Reuters.