The Duran Podcast - Russian economy; Sanctions, inflation and high interest rates

Episode Date: July 18, 2025

Russian economy; Sanctions, inflation and high interest rates

All right, Alexander, let's do an update on the Russian economy and how things are going in Russia. We have, we're almost at the 18th sanctions package of the EU, Slovakia. That keeps on vetoing it, but even Fizzo said that eventually he will not be able to veto the package anymore. And we are going to get the 18th sanctions package. And of course, we have Trump's threats of 100% tariffs on Russia and on countries' trade. with Russia, China, India, Turkey, Brazil, etc. And the Russian economy, the Russian economy, which continues to grow, but my sense of things is that it is slowing down. That's just my my sense of things as I see them in Moscow. And it does appear that the global situation, the global

economic situation does have an effect on Russia. I mean, Russia is not completely isolated from everything that's happening in the world. You do have the economy slowing down. You do have very high interest rates. As in everywhere, every country in the world is going through this. You have an inflation problem. Russia is no different than Greece or Cyprus or anywhere else I've been to in Europe. And there are a lot of worries, I think, about the future outlook of the Russian economy. The Russian economy, say, in six months to one year's time, can it continue to function in a very unstable and chaotic global economy coupled with the pressure of sanctions? What are your thoughts on this? Right. There's a lot of things to say here. First of all, I think that we need to understand where and where.

the Russian economy is and why what has happened has happened. And a lot of this relates to macroeconomic policy and the policy of the Russian Central Bank and of the finance ministry. And by the way, of the president of Russia, Vladimir Putin, who is the ultimate, always the ultimate decision maker. So let's just review what has happened over the last three years. So back in 2022, February 2020, we had the massive sanctions package imposed by the West, the freezing of the central bank assets, the clear attempt at that time to destabilise and break the Russian economy down. And we had an inflation surge and the central bank, Nabilina, raised interest rates to 20% to bring inflation down and under control.

And it was completely successful. And one consequence of that, however, was that until Russia changed its trading patterns, there was a time when imports collapsed, the trade surplus rose to extraordinary levels and domestic demand crashed. And in 2022, for the first couple of months, we actually had a recession. So the economics ministry, and I should say that in Russia, there are three different ministries, through different institutions that are constantly fighting each other and which decide economic policy between them. One is the finance ministry. The other is the central bank.

And the third is the economics ministry. The economics ministry, just as a piece of history, is it evolved out of the Soviet State Planning Committee, GOS plan. It's the former Soviet State Planning Committee, massively reformed. Of course, all the personnel have changed. But it has a structural bias to want to, to see the economy grow. The central bank wants economic stability.

The finance ministry basically wants to cover its budget. The finance ministry, ultimately, by the way, is the strongest of the three. So the economics ministry back in the summer of 2022, was saying, look, demand is collapsing inside Russia because of these very high interest rates. because of the sense of crisis caused by the sanctions, what we need to do is to boost internal demand to get the economy moving again and we need to boost wages. So in fact, from the summer of 2022,

right up until the spring of 2024, there was a sustained policy of increasing real wages. So real wage growth in Russia grew very very much. fast during that period. At the same time, the central bank was leaned on to start cutting interest rates. And with some reluctance, they cut interest rates. And then they started to cut interest rates much faster, perhaps, than they should have done. And interest rates fell to, I think, it was about 7%, even as real wages were rising. So what then happened in the spring of 2024 is that with real wages rising, interest rates very low, credit exploded and demand surged.

That caused severe overheating in the economy, and that led to. a big inflation spike. So the central bank then responded to that by raising interest rates. Now, the way the central bank in Russia raises interest rates is completely different from the way it does, where it happens in every other, in every Western country, because in the West we see interest rates rise gradually and they're usually at about the level of inflation or a little above. In Russia, they don't do that. They raise interest rates to absolutely sky high levels. So Nubulinna, who is the central bank chair, pushed up interest rates eventually to 21%. Double the rate of inflation. Inflation in Russia has been falling because the idea was slow the economy, create a recession

to bring inflation down and to balance demand and supply within the economy again. And probably in June, we got a recession. We haven't yet got the actual figures, but you said that the economy is slowing. I suspect that what we will see when the figures come through is that in June it actually contracted. So what will now start to happen is that as the economy contract, attracted, inflation has begun to fall. The current rate of underlying inflation is no longer around 10, 11%, as it was at the start of the year. It's probably closer to about 5%. Now, that means that interest rates over the last few weeks and months,

have actually been going real interest rates, have been going higher. Because what you get is, in order to understand interest rates, interest rates, the real rate of interest is the rate of interest above inflation. So if inflation is at 11%, and your interest rate is at 21%, real interest rates are around 10%, which is already very high by global standards, If the real rate of inflation is about 5%, but your interest rates are still at 15%, that means that real interest rates, I'm sorry, 20%, your rates of interest rates are 20%. Your real interest rates are going to be 15%.

Now, that is absolutely crippling. It is in that kind of situation, credit, supply of credit to the economy. economy is going to completely stop. People are going to start to save money. The money is going to start going back into the economy rather than leaving it, which is going to cause your currency to appreciate. We've had the ruble rise and the rising of the ruble has been creating problems because it means that exports are actually more expensive than they otherwise would be. And And it means that that's having an effect on the government's budget. So interest rates now have to come down.

And this is going, is starting to happen. So, Nevulina in June gave a signal that she's going to start cutting interest rates. She shaved 1% off, which is, of course, nothing. It's a token cut. Now, the only question for me then is this, is she going to cut interest rates this month? And there is some pressure on her to do so. The economics ministry says that she needs to cut interest rates to 18%. In other words, to cut interest rates by 2%, which is still going to leave interest rates very high,

but it will be a forward signal to the economy and to banks and lending institutions that you can start to lend because if you lend that interest rates will fall, and that means that borrowers will be able to afford in future your repayments because at the moment, financial institutions don't believe that their borrowers would be able to afford the kind of interest rates that they'd be having to pay if they stayed at the level that they are. So does Nebulae do that in July, or does she wait to September? Until the harvest has been brought in, the harvest in August usually results in a decline in food prices, which means that the headline rate of inflation will fall further still.

And that will make her more comfortable with the fact that the inflation rate is indeed coming down. and at that point she might be able to start cutting interest rates more aggressively. I suspect that it's, you know, this will turn on the dime. There's a lot of pressure to cut interest rates now to at least give a forward signal. Over the next couple of days, maybe as quickly, as some of say the 25th of July will be when the central bank makes the decision. We will see. But I think there is a possibility that it could be September. But of course, if she postpones till September, there will be an enormous amount of criticism from within the economics, from the economics community, from the business community, from the car industry, who are complaining that buying cars is now becoming completely unaffordable.

And homes and all of those people. So there will be a cacophony of criticism if she does postpone for six more weeks. So we'll see what happens. But this is very much the pattern in Russia. And can I just explain also? I know I've been talking rather a lot. Why the central bank does this and why Putin, the president, consistently backs the central bank when they do this, which is that they are absolutely haunted by what happened in Russia in the 1990s.

They both lived through a period of hyperinflation. They are very, very frightened of inflation getting, taking hold in Russia again. It's easy to forget that Russia had two hyperinflation episodes in the 1990s, one in the early 1990s when the Soviet price controls were scrapped, the second in 1998, when the budget basically collapsed. So they don't want that to happen. And the other factor, which always limits domestic demand, is that whenever the interest rates grow, in contrast to the West, where we tend to... to compensate for high interest rates by relaxing fiscal policy, by increasing budgetary spending,

by running a bigger budget deficit. In Russia, they don't tend to do that, again, because they're frightened of another inflation cycle becoming embedded in the economy. So at the moment, in the middle of a war, the Russian government is running a budget deficit of 1.7%. In fact, overall, debt levels, the debt to GDP ratio in Russia has been falling, which is completely the opposite of what we would be doing in the West. Now, as I said, this is a very idiosyncratic economic policy. It has its historic basis. But inevitably, It's unavoidable at some point over the next couple of months. Interest rates are going to start to fall.

There will always be a lag. It's likely that we're going to get much lower growth this year if we get growth at all. But it's likely that growth will start to come back next year. Where are the reports coming from then that claim Russia's reserves are getting low? I don't know. There are a lot of reports which are claiming this, that Russia's running down there. reserves. Yes.

I mean, again, I don't understand that because if you're talking about the government's position, if you're talking about the central banks position, the reserves are actually been increasing. The even despite the fact that the ruble has been so high, Russian central- Yeah, they're saying because of the high route, yeah. The Russian central bank reserves have actually grown over the last couple of months. the debt to GDP ratio has improved. And the effect of the high interest rates is, of course, it's encouraging people to save.

So again, I mean, there's an awful lot of things being said. What is probably true, and it may be that this is where a lot of this theory comes from, is that, of course, with such high interest rates, debt repayment is expensive. and anybody who is in debt is going to be under a lot of strain. And that probably is where that story is coming from. But the government itself, its finances overall appear to be in strong shame. Is there a risk that as Nebulina decreases the interest rates that you get to that overheating cycle again? Yes, yes, absolutely.

I mean, that's what happened in 2020. And she, I mean, she says it herself. She cut into straits too aggressively in 2023, 2024. The result was that we got very high growth in 20203, 2024. 4.1% growth in 23, 4.3% GDP growth in 2024. The likely growth rate was higher, probably closer to 5%. because Russian statistics are pretty accurate actually by comparison with those in other countries, but they don't give a complete picture.

But the economy was certainly overheating badly by the summer of 2024. There is a real possibility because the economics ministry, of course, what they are focused on always is the growth rate. And they'll be telling Putin, we've got to get the economy going back, you know, firing all cylinders. We've got to get things moving at, you know, the four, five percent rate that it was in 2023, 2024 again. And that could result in pressure on the central bank to increase, to cut interest rates too aggressively, as it did in 2023, 2024.

Does the Russian Central Bank? Does Russia have the time and space to decrease the interest rate gradually? Because everything you described is spot on to what I am seeing here on the ground. Very, very high ruble, very difficult to get loans, to service those loans, for businesses to get credit, small businesses. medium, including big businesses as well. Very difficult to get a car, to buy a home. All of these things I'm seeing on the ground, and there are a lot of complaints about all of this and a lot of fear that if this continues, then it can't continue. That's the fear.

It just can't continue because people just can't get on with their lies, with their business. Their businesses can't operate in this time. type of environment. What do you see as far as the time and space from Nebulae to decrease these interest rates gradually, given that there is a lot of pressure, not only from the political class or the people that want her to lower those interest rates quickly, but even just the everyday people in Russia are frustrated with the fact that, you know, hey, I can't, you know, get alone for a car with 20 or 25% interest.

It's not doable. And the same with a home, the same with home repairs. All of these things that affect people. The everyday people is something that is putting a lot of strain on Russia and Russian society. And can you also add, does the West see this as well? and perhaps there may be using this to drag out the conflict, maybe believing that this strain will eventually get the Russian economy, because you do hear a lot of statements from Europe and from the United States, which is that the sanctions will eventually have their effect.

Just give it time. Give it time and the sanctions will eventually lead to the collapse of the Russian economy. Yes, absolutely. Let's unpack all of that. I think a key thing to understand. about interest rates is, of course, the central bank's interest rate might be 20%, but the interest rate that a bank will charge you for a car loan or a mortgage loan or a credit card loan is going to be much, much higher. And if you're talking about credit cards, of course, Russia has its credit cards.

I mean, it's going to be very, very much higher. And of course, if you're already in debt to your credit card. And by the way, debt levels in Russia are relatively low. So this is why this policy can be continued for at least for a while. But if you are in debt, you are going to be in severe trouble and you're going to want this to change and you want to change this fast. And to repeat again, as the underlying rate of inflation falls, the actual interest rate is increasing. She may have shaved the headline rate of interest rates from 21 to 20 percent, but the reality is that over the last few weeks, the real rate of interest has actually increased further. So does she have time? Well, this comes back to the question of whether she does

it in July or whether she waits to September. If she waits to September, there is going to be an awful lot of anger and an awful lot of complaints and people are already complaining to Putin. And I think that beyond a certain point, I mean, she would probably be at risk of losing her job if she stuck to that. Nebula is very careful. She's very, very cautious. She's very nervous of inflation in Russia. She continues. and this is perhaps one of the most extraordinary, and some would say misguided things about her because she wants an underlying rate of inflation.

She wants a, her inflation target is 4%. And she stuck to that target through thick and thin ever since she became central bank chair in, I think it was 2013. Now, I mean, Russia is in the middle of a war. was to generally cause inflation. You would say that maybe in an inflation situation, which is unusual, you can actually be a little bit more relaxed about your target. I mean, if it goes up to 5 or 6%, it is not a disaster.

Certainly not in a country like Russia. But anyway, the pressure on her will increase, and she is under that pressure now. my guess, and it is purely a guess, is that the pressure now is probably overwhelming and that she will cut the interest rates in July on the 25th of July, probably a 2% cut, perhaps less. Given that we're talking about Nabilina, it is not impossible that she could defer this to the autumn. But, you know, my best guess is she will cut the interest. rates on the 25th of July to 2% by 2%. Does Russia have time and space to do it? Yes, but not indefinite time and space. I mean, they have to start bringing interest rates down in the autumn.

They can't do, they can't continue this forever. Obviously not. And Nebulae did come very close. once in the past to doing it almost forever. In fact, that was when I first started writing about the Russian economy, because from about 2015 until about 2017, she kept Russia with real interest rates of 5%. I mean, this, you know, on the year after year after year, and eventually it basically least suffocated growth. The economy would have grown much more strongly, but she was keeping interest rates at those sky high levels because, again, she was worried about inflation and believed with some cause that, you know, if she relaxed interest rates, given the history and capacity

constraints and all of that, inflation would take off again. So, I mean, she has form here, but I think This time, I don't think it's going to be possible for her to pull that off again. And I think we will start to see interstrates be cut over the course of this year, probably, as I said, in July, probably more aggressively in the autumn. Now, this brings us back to the whole sanctions thing. It's the worst using this. Exactly. It's the worst using this. Well, the West has a very one-dimensional understanding both of the Russian economy and the Russian economic debates.

I mean, they tend to cherry-pick what people specifically say. I read a bizarre article where the economics minister, Maxim Roshetnikov and Nabilin at the central bank chair, were lumped together, for example, then it was said that they were agreeing with each other. which is completely not rude. I mean, you know, they are, if you're like, mortal enemies. I mean, people have a very one-dimensional view. But they are getting reports about the fact that there is this massive issue of credit, that credit has been squeezed out of the economy in the way that has been done. And they will have registered the fact that the economies probably stop growing in

might even have contracted, and they will say to themselves, well, this is the result of our sanctions policy. Now, sanctions has obviously had a part to play in all of this, because going all the way back to what I was saying at the beginning of the program, the reason we are in this situation at all is because of the sanctions, the fact that Nebula had put up the interest rates in 2022, brought them down again in 2023, 2024, the fact that the economics ministry pushed for higher wages, all of those things. So all of this is tangentially connected to sanctions. But in order to understand what is really happening in Russia, you need to look at macroeconomic policy in the country itself, I don't think the West gets that at all. What they will say is if inflation goes up, as it did last year, that must mean it's because of the sanctions. If they see a contraction

in June, they will say it's because of the sanctions. If anything happens other than steady non-inflationary growth, then it's always because of the sanctions. And if Russia does achieve non-inflationary growth, which it did for a time, by the way. I mean, in 2023, inflation was quite subdued. If it does achieve non-inflationary growth, that's the fault of the Chinese and the Indians and the UAE and all of those people and Turkey because they're all helping Russia, and they're all helping Russia bypass the sanctions. So I think this is the line that people in the West are going to take. But obviously, they see the issues in Russia today. And of course, that is going to make them want to feel that, you know, if they push a little bit further

with the sanctions, then, you know, eventually this whole powers of cards will come tumbling down. I think that, just to wrap up with the video, I think that's why this explains their belief that if they push harder on sanctions, just another package, another package, one more package, Come on, Trump, place more sanctions. If they just push a little harder, eventually it's going to break. It's going to break Russia. I think that is the reasoning. That's how they see things.

Yes. And they see everything that's going on in Russia. I want to stress, just again, Alexander, that you have the problems in Russia with the sanctions and problems that are specific to the Russian economy, which every country has specific problems. But it's coupled with the global outlook as well, which is just horrible, which is also having an effect. Yeah.

Absolutely, because of course it is. I mean, let's actually just talk about the global situation, which is, of course, that it has meant that oil prices have been lower. Now, oil and energy still remains Russia's big exports. So the way Russia tends to compensate for lower energy prices is with a softer ruble. We've discussed this many times. But instead of that, the ruble is too strong.

It's now stronger than it was, I believe, in February 2020. I see it. I see here. It's strong. So, I mean, now, now, there's two things to say about that. That is actually very bad, given the realities of the global situation that you aren't discussing. Russian needs a weaker ruble, not a stronger one. But again, look at it from another point of view, if the place really was going to fall apart,

would the ruble be as strong as it is? Would it actually have strengthened since the sanctions announcement that Trump made a few days ago? Presumably not. Yeah. All right. We will end the video there, the durand.com. We are on Rumble, Odyssey, bitch, you, telegram, rock, fan, and X. Go to the Duran shop.

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