MOSCOW: The pace of Russia’s economic growth slowed in the second quarter of 2024, official data showed Friday, amid concerns over stubborn inflation and warnings of "overheating”.
Gross domestic product (GDP) dipped from 5.4 percent in the first quarter to four percent from April to June, the lowest quarterly result since the start of 2023 but still a sign the economy is expanding. Inflation meanwhile showed no signs of easing, with consumer prices rising 9.13 percent year-on-year in July — up from 8.59 percent in June and the highest figure since February 2023, according to data from the Rosstat statistics agency.
The Kremlin has heavily militarized Russia’s economy since sending troops into Ukraine in February 2022, spending huge sums on arms production and on military salaries. That spending boom has fuelled economic growth, helping the Kremlin buck initial predictions of a recession when it was hit with unprecedented Western sanctions in 2022. But it has sent inflation surging at home, forcing the central bank to raise borrowing costs.
The central bank has aggressively raised interest rates in a bid to cool what it has warned is an economy growing at unsustainable rates due to the massive increase in government spending on the Ukraine offensive. The bank raised its key interest rate to 18 percent last month — the highest level since an emergency hike in February 2022 took it to 20 percent.
The bank’s governor Elvira Nabiullina said the economy was showing signs of "overheating” and pointed to difficulties with international payments — an effect of Western sanctions — as another factor driving up inflation. Russia is set to spend almost nine percent of its GDP on defense and security this year, a figure unprecedented since the Soviet era, according to President Vladimir Putin. Moscow’s federal budget has meanwhile jumped almost 50 percent over the last three years — from 24.8 trillion rubles in 2021, before the Ukraine offensive, to a planned 36.6 trillion rubles ($427 billion) this year.
Since so much spending is being directed by the state, which is less responsive to higher borrowing costs, analysts fear interest rate rises may not be an effective tool against inflation. Consumer prices are a sensitive topic in Russia, where many people have virtually no savings and memories of hyperinflation and economic instability run deep.
Meanwhile, the Russian ruble weakened further against the dollar on Friday, according to LSEG and Moscow stock exchange data, with some traders saying that Ukraine’s surprise attack in Russia’s Kursk region was one of the factors behind the fall. Trading in major currencies shifted to the over-the-counter (OTC) market, obscuring pricing data, after Western sanctions on the Moscow Exchange and its clearing agent, the National Clearing Centre, were introduced on July 12.
By 1130 GMT the ruble was 2.7 percent down at 89.00 against the dollar, according to LSEG data, which can serve as a guide for OTC rates. One-day ruble-dollar futures, which still trade on the Moscow Exchange, were down 0.8 percent at 86.44. However, some traders said that in the actual OTC market, dominated by sanctioned Russian banking giants such as Sberbank, the rouble’s moves were more moderate, with Sberbank bidding at 85.00 to the dollar.
Russian forces are battling Ukrainian troops for a fourth day after they smashed through the border in the Kursk region in one of the biggest Ukrainian attacks on Russia since the war began in February 2022. "Perhaps this is a justified reason, for example, for foreign banks remaining in Russia to buy currency,” said a dealer at a large Russian bank. The ruble has been on a weakening streak since the attack began.
The ruble was expected to receive support this week from increased net daily sales of foreign currency by the central bank and the finance ministry that went into effect on Aug 7. "Kursk shattered market expectations that interventions would be sufficient to support the ruble,” the trader added.
Another trader, who spoke on condition of anonymity, said that some importing companies were also hoarding foreign currency as the rates became attractive after weakening in July. According to an analysis of the OTC market, the ruble was down just 0.3 percent to 11.91 against the yuan, which has become the most traded foreign currency in Moscow. It was down 1.9 percent at 96.53 against the euro. — Agencies