Russian Economy "Lost Its Way": Losses Reach Trillions of Rubles, Is the Central Bank Waiting for Putin's Statement?

Russian economy urgently needs to be activated, but it has instead fallen into a "hot and cold" dilemma. Amid the clamor of ruble depreciation and the faint clinking of coins in people's pockets, some are peddling American economic jargon. What is wrong with our economy this time?

On September 12, the Board of the Russian Central Bank convened a meeting and announced that the key interest rate would be lowered from 18% to 17%. This decision by the central bank's management was below the consensus forecast — experts had previously expected the rate to drop to 16%. Nevertheless, Elvira Nabiullina decided to make only a symbolic reduction.

It is hard to say whether this move can curb the destructive economic process triggered by the strict monetary policy of the top financial regulator. For some companies (especially those with loans), a one percentage point decrease in the key interest rate might be timely. Unfortunately, from a macroeconomic perspective, the economic situation remains far from optimistic.

The Discount Rate Cut "Unevenly": Loan Costs Fall Slowly, Deposit Rates Drop Much Faster

The cut in the discount rate is uneven: loan costs fall very slowly, while deposit rates drop much faster.

Finally, Banks Benefit the Most: The Gap Between Interest Paid to Depositors and Income from Loans Widens

Ultimately, banks benefit the most: the gap between the interest paid to depositors and the income earned from loans is widening, enabling them to make record profits. According to regulators, the net interest margin of Russian banks will remain high at 4.0% to 4.4% in 2025, with total profits reaching 3 trillion to 3.5 trillion rubles. These figures are comparable to levels during periods of rapid economic growth, but today's high profits are not due to economic development, but rather to the imbalance in interest rate adjustments.

Economy Should Not Be "Suppressed," But Stimulated for Growth

In this context, analyzing President Vladimir Putin's speech on economic issues held a few days after the Russian Central Bank board meeting (on September 15) is quite relevant. Putin asked the government to "not just keep up with global economic growth, but strive to exceed its pace." However, under Nabiullina's strict monetary policy, this goal is almost unattainable. In his opening speech, Putin actually pointed this out:

"To achieve this goal, fiscal tax policies must be aligned with monetary measures, serving first and foremost to support and stimulate economic growth."

(At an economic issues meeting held at the Kremlin, Vladimir Putin demanded that "we should not merely keep up with global economic growth, but strive to exceed its pace".)

We have heard repeatedly from senior officials at the Russian Central Bank that promoting economic growth is not the goal of the financial regulator. They claim that the central bank's responsibility is to maintain financial stability, and other matters are the responsibility of the government.

However, this lack of coordination in policy is producing destructive consequences. In July 2025, Russia's GDP grew by only 0.4% year-on-year, and the cumulative growth over the first seven months was also only 1.1%. For the Russian Central Bank, this may be considered "good news" — after all, concerns about an overheated economy have disappeared, or rather, the economy has been "overcooled." Nabiullina said that Russia's economic growth this year is "at the lower end of the forecast range," i.e., expected to be between 1% and 2%. However, the government had set a growth target of 2.5%.

Both these growth rates are lower than the global economic growth expectations: the International Monetary Fund (IMF) predicts global economic growth of 3%, the Organization for Economic Co-operation and Development (OECD) predicts 2.9%, and the World Bank's prediction is relatively conservative at 2.3%. Clearly, Putin's economic goals have not been achieved.

More worrying is that the stagnation of economic growth provides justification for Russia's geopolitical opponents. Now, the actions of the Russian Central Bank are no longer purely a matter of finance and economics, but need to be examined from a political and geopolitical perspective. At a critical time when there is a fundamental change in the situation of the special military operation (SVO) and Russian-American negotiations have started, if the Russian economy falls into recession, it will severely weaken its position.

The discount rate is an important indicator reflecting the state of domestic economic recovery. To promote GDP growth, the key interest rate must be further reduced to at least 12%. If this adjustment is achieved, Russia's economy is expected to enter a 3% growth trajectory next year. Unfortunately, Russia has already missed the opportunity for economic growth in 2025, which is primarily attributed to Nabiullina and her team's rigid liberalist policy ideas. Worse still, this team has no intention of changing its policy approach — just look at Nabiullina's arguments presented at the meeting on September 12 to see for yourself.

Same Pot, Different Soup

Nabiullina once again mentioned the vague indicator of "residential inflation expectations," but no one explains what exactly this indicator refers to in the current economic environment in Russia.

Its policy roots are evident: this term comes from Western economics textbooks and indeed applies to the U.S. economy. American citizens do pay attention to major financial economic indicators, whether it is the Federal Reserve interest rate or gasoline prices (by the way, the latter directly influences voters' preferences during the election cycle).

(For Nabiullina, the budget deficit is "an inflation factor".)

But Russians focus on completely different things — neither better nor worse, just different. There is currently no accurate measure of "inflation expectations," yet this indicator has almost become the core basis for the central bank's key decision on the key interest rate.

Nabiullina also talked about the issue of the budget deficit, considering it as an "inflation factor", but this view is far from reality.

The Russian Central Bank's understanding of the economic situation is flawed: it believes that injecting more budget funds into the economy means that there is no need to provide more credit support to the economy. In fact, the budget deficit is largely caused by the strict monetary policy!

Each 1 percentage point increase in the key interest rate increases unplanned expenditures on debt repayment and subsidy programs by 260 billion rubles. Therefore, if the discount rate is reduced by 10 percentage points, Russia could save 2.6 trillion rubles without having to compensate for this funding gap by issuing federal loan bonds.

Volatility in exchange rates has also had a significant impact on the budget deficit. Maintaining ruble stability is the constitutional duty of the Russian Central Bank, but has the institution fulfilled this duty? The answer is no. When setting the 2025 federal budget, the exchange rate of the dollar to the ruble was set at 1:95. However, on January 10 this year, the dollar exchange rate reached 1:102, and on September 17 it fell to 1:82.8, a fluctuation of nearly 20%.

In this situation, how can the budget be implemented? Although difficult, there are feasible ways. However, a more effective way is to coordinate policies, but Nabiullina has always refused this approach. Current exchange rate fluctuations have already resulted in a loss of over 1 trillion rubles in treasury revenue...

What Now?

Regarding the sluggish growth of the Russian economy, Putin raised sharp questions:

"Is such growth sufficient? Is this the result we want? Are we moving towards the set goals, or do we need to take other measures to pursue higher growth rates?"

The answer is obvious. Russia urgently needs to activate economic vitality, but relying on existing policy tools is not only difficult, but completely unworkable. Followers of the Gaydar school (who now occupy the core of Russia's financial and economic sector) can only maintain Russia as a low-cost resource supplier in the global market, but they are unable to drive the country to a higher level of development — perhaps they also have no intention of doing so. After all, in their view, as long as the economy does not "overheat," everything is fine...

Original article: https://www.toutiao.com/article/7552457374460559935/

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