Russia maintains rate cut streak as Kremlin's wartime spending stalls

The Bank of Russia dropped its benchmark interest rate by 2 percentage points on Friday, cutting it to 18% in a direct response to a slowing economy.

This was the central bank’s second consecutive cut, following its June decision to reduce the rate from 21% to 20%, ending a rate freeze that had lasted since 2022.

The new cut lines up with what analysts had been expecting and comes as wartime government spending and oil revenue begin to lose steam.

From 2023 through 2024, the Russian economy managed to stay afloat despite sanctions and war-related uncertainty, largely because of high defense spending and stable crude exports. But that growth has now started to cool, and inflation, while still high, has finally started to ease.

The central bank had taken interest rates to a record 21% last October to curb soaring prices, but that peak didn’t last long.

“If you look at the more recent dynamics, the inflation pressure has really subsided,” said Vasily Astrov, economist at the Vienna Institute for International Economic Studies. He added, “There are many arguments for cutting the policy rate further, and there are very few, really, for preserving the current level.”

Borrowers push back as lending strains increase

Inside Russia, companies and government bodies had been pressing the bank to act, warning that interest rates were too high for businesses to borrow and invest. Several banks have also reported a rise in non-performing loans, pointing to increased stress in the credit system. This growing pile of unpaid debt has added another layer of urgency to the central bank’s actions.

Astrov warned that how quickly or slowly the bank cuts going forward will directly affect how bad the loan situation gets. “At the moment I think the situation is not critical overall but if the central bank is too slow in easing or delays easing too much, the situation may become problematic,” he said.

Even with inflation cooling, the central bank doesn’t plan to rush into aggressive easing. Governor Elvira Nabiullina had already said back in June that any rate cuts in 2025 would happen gradually, aiming to push inflation down to a 4% target by 2026.

So far, that target isn’t entirely out of reach. Annual inflation had dropped to 9.4% by June, after running in double digits for much of the year. But that path could shift quickly if budget spending grows again.

Central bank keeps one eye on Kremlin’s spending plans

Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center in Berlin, said the central bank could deliver “two or more” rate cuts during the autumn period, saying, “They signaled this very clearly.” But she also noted it’s too early to say inflation is completely under control, especially if the Kremlin decides to pump more money into the economy.

Prokopenko warned that the state still has access to large amounts of domestic borrowing, and if Vladimir Putin wants to keep the war going, public spending could climb again, pushing inflation right back up.

“There is a huge capacity for domestic borrowings. And if Putin has [the will] to continue the war, which he definitely has, the pace of state spending could turn pro-inflationary,” she said. “So I think the central bank would be cautious.”

While the new 18% rate brings some breathing room, it also raises fresh questions about whether Russia’s central bank can walk the line between easing financial pressure and containing inflation, all while the Kremlin’s war machine remains active.

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