No matter how the Kremlin spins it, Russia is still losing its battle with stagflation

Ukraine crisis
Ukraine crisis

There was some good news at the Kremlin today, with economy minister Alexei Ulyukayev reporting that Russia’s GDP grew by 1.2% in the second quarter, up from 0.9% in the previous quarter. As a result, the ministry might upgrade its growth forecast for the year, he said, according to the transcript of a meeting with president Vladimir Putin.

Outside the country, however, others aren’t so upbeat. The International Monetary Fund (IMF) said last week that the Russian economy will grow by only 0.2% this year, with weakness stemming from soft oil prices and the squeeze of Western sanctions. On a recent call between US president Barack Obama and German chancellor Angela Merkel, the leaders hinted that sanctions could get tougher amid a spike in violence in eastern Ukraine.

The other specter haunting the Russian economy is stagflation, which we have covered before. Russia recently recorded its highest inflation rate in three years—7.8% in June—despite its stalled-out economy. The IMF expects average inflation this year to fall a bit, to 6.6%, but this won’t do much to help the situation:


Even otherwise-positive indicators in Russia are getting a negative spin outside the Kremlin. Record-low unemployment—a mere 4.9% in May, the latest month available—is seen as a sign of the country’s aging population and an uptick in emigration. Indeed, weak economic growth and chronically low productivity certainly don’t suggest that the jobless rate reflects an economy firing on all cylinders. Investors continue to shun key sectors; and net capital outflows could reach $100 billion this year.

If things continue like this—the IMF warns of “considerable downside risks” to its already grim forecast—Ulyukayev’s next meeting with Putin could be a lot more uncomfortable. Not that Russia’s faltering economy has done much to dent Putin’s popularity. At least, not yet.

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