Russia’s Central Bank was forced to hold its key interest rate at 21% in a major blow for the economy. The decision comes as inflation continues to hover at around 10.3%, latest financial data for April shows.
Elvira Nabiullina, the bank’s governor, said there was broad consensus among officials to keep the rate on hold. She added: “What we are saying is that it will be necessary to maintain tight monetary conditions for an extended period of time.”
Nabiullina has been coming under increasing pressure from the Kremlin and business leaders to reduce the rate.
The current rate is at its highest level in 20 years and is imposing immense financial strains on companies across the country.
Vladimir Putin had previously warned the governor not to “cryogenically freeze” the economy.
Sergey Chemezov, the head of Russia‘s defence conglomerate Rostec and a former KGB colleague of Putin, also cautioned that many companies could go bust.
“And at such an interest rate, all the profit that we provide is all eaten up by the interest that we are forced to pay to the bank,” he told the RBK publication.
“If we continue to work like this, then most of our enterprises will go bankrupt.”
Bankruptcies are reported to be 20% higher in 2024 than they were in 2023, with many more closures expected to come in the near future.
Russia’s biggest steel manufacturer, Magnitogorsk Iron and Steel Works, has enough reserves only for another six months and has reported a “very negative” outlook for 2025.
In slightly better news for the Kremlin, the bank predicts oil prices stabilising at US$60 per barrel going forward.
Oil and gas revenues typically contribute between 30% and 50% of total revenues to the federal budget.
The income derived from the sales of fossil fuels play a vital role in helping Putin to fund his war in Ukraine.
The bank said it expects global demand to rebound as trade restrictions ease, leading to a rise in oil prices.
However, it warned that the risks of a further escalation of global trade wars are significant.
“Prolonged enforcement of restrictions may affect the dynamics of oil prices,” the central bank said.