Russia’s Inflation is Soaring—But Does It Matter?

In a Strong Economy, Price Pressures Can Linger Longer Than Expected

While much of the world has seen inflation cool, Russia is heading in the opposite direction. Consumer prices surged by 9.5% year on year in December, up from 8.9% in November, far exceeding the central bank’s 4% target. Food prices have been particularly volatile—fruit and vegetable costs have jumped by more than 20% in the past year. In most economies, such persistently high inflation would be unsustainable. But Russia is no ordinary economy.

What’s Driving Russian Inflation?

The latest inflationary surge is driven by both external shocks and domestic pressures. Western sanctions have tightened, weakening the rouble and increasing the cost of imports. Russian businesses importing everything from American smartphones to Italian handbags have had to find workarounds—often through middlemen in countries like Austria and Greece—driving up costs. There’s even evidence that French winemakers are skirting sanctions through backdoor channels. Luxury goods, in particular, have felt the pinch: the price of a 2006 Clos de Tart, a premier Burgundy served at Moscow’s famed White Rabbit restaurant, has soared nearly 30% since Vladimir Putin launched his invasion of Ukraine.

Meanwhile, labour shortages are exacerbating inflationary pressures. Conscription and mass emigration have depleted the workforce, pushing unemployment to a record low of just 2%. As a result, businesses are competing fiercely for workers, and wages have skyrocketed. In 2024, nominal wages rose by a staggering 18%, further fueling inflation.

Government spending is another major driver. Moscow has unleashed massive fiscal stimulus, pouring money into defense, welfare, and infrastructure. The central bank warns that demand still far outstrips supply, making it difficult for businesses to keep up.

A Battle Over Policy

A deep divide is emerging within Russia’s policymaking circles. The central bank, dominated by traditional economists, is desperate to rein in inflation. On February 14th, it is expected to keep interest rates at 21%—their highest level since the early 2000s. In addition, stricter credit regulations have been introduced to curb borrowing.

But those aligned with Putin’s administration have different priorities. Military spending continues to exceed budget projections, now accounting for around 7% of GDP. The government is flooding the economy with payouts, including bonuses for soldiers and compensation for families of fallen troops. At the same time, the Kremlin is pressuring private businesses to contribute to the war effort—a form of hidden economic stimulus.

Can Russia Sustain High Inflation?

In most emerging markets, high inflation leads to one of three major crises:

1. Debt Troubles – Rapid inflation can make it harder to service foreign debts, particularly if the currency weakens. However, Russia’s large current-account surplus and strong foreign asset reserves make a debt crisis unlikely.

2. Rising Interest Rates – As inflation surges, central banks raise rates, increasing government borrowing costs. While Russian rates have risen sharply, Moscow’s low national debt keeps financing manageable.

3. Public Discontent – In many countries, inflation leads to unrest as citizens see their purchasing power eroded. But Russians, for now, appear relatively content. Over the past year, real household incomes have grown by 10%, with wage increases and government subsidies outpacing inflation. Consumer confidence is near all-time highs, according to independent pollster Levada Centre. Meanwhile, household consumption has climbed at least 6% year on year, reflecting resilient demand

A False Sense of Stability?

The big question is: How long can this last? At some point, Russians may tire of rising prices and demand change. Additionally, a potential shift toward peace talks, as hinted at by Donald Trump on February 12th, could create new economic challenges. Much of Russia’s economic activity is tied to the war effort, from defense production to government contracts. A transition to peacetime could be more disruptive than expected.

And then there’s the elephant in the room: Western sanctions remain firmly in place. Even if inflation stabilizes, Russia’s long-term economic outlook is grim. Without access to global markets, foreign investment, or cutting-edge technology, Russia’s economic future looks bleak—no matter what happens with inflation.