Russia's Inflation Battle: An Unwinnable War Against Rising Prices and Economic Instability

In a stark revelation of financial distress, Russia confronts rampant inflation, with the Central Bank seemingly powerless to curtail the escalating prices. Despite multiple interest rate hikes, including a record 21% key rate, December's inflation threatens an annual surge of 29-30%. This economic volatility is underpinned by a burgeoning money supply and strained political decisions influenced by Russia's geopolitical maneuvers, notably its engagement in Ukraine.

As of December 2024, Russia's money supply (M2), encompassing all cash in circulation and non-cash funds, registered a staggering 111.1 trillion rubles, coupled with M2X, which includes foreign currency deposits, hitting 126.7 trillion rubles. This increase contrasts sharply with the rates observed before the escalation of the Ukraine conflict, reflecting an economy under pressure from both internal and external forces. Moreover, the Central Bank's attempts at stabilizing the ruble through halting foreign currency purchases have done little to reassure markets or citizens.

Price spikes are not just numbers on a chart; they translate to a higher cost of living, affecting everyday Russians who notice "significant" price increases. This sentiment was echoed by 53% of survey respondents in November 2024, mirroring sentiments from the previous year. The disconnect between official inflation rates and public perception suggests a crisis of confidence in monetary policies.

Complicating matters, the inflationary trend is fueled by monetary factors often dismissed or underestimated by policymakers. With the M2 money supply growing by 20% from year to year, the direct relationship between the money supply increase and inflation is undeniable. The Central Bank's strategies, which include managing the monetary base and adjusting bank money multipliers, appear insufficient in reversing or even stalling these trends.

Russian companies, particularly in the financial sector, are caught in a paradox. While some borrow heavily, speculating that inflation will erode their debt, the real sector—fundamental to economic stability—lags, stagnating under the guise of growth. This has led to an inflated credit market that cannot be sustained in the long run, pointing towards an eventual financial correction that could be painful for both lenders and borrowers.

Despite Russia's relatively low public debt and manageable budget deficit—enviable compared to G7 nations—the fundamental issues lie in monetary expansion and fiscal policies that prioritize political objectives over economic stability. Such strategies risk long-term damage for short-term appearances of financial health, leading to cycles of boom and bust that could ultimately destabilize the Russian economy further.

The Central Bank faces a grim prognosis. With pressure to contain inflation without stifling growth, its balancing act continues into 2025. However, without a significant shift in policy direction, particularly in controlling the money supply and reining in unchecked credit expansion, Russia remains on a precarious path that could lead to severe economic repercussions.