Russian economy plunged into turmoil by rampant inflation after exodus of household brands

Russian consumers are being squeezed by the ripple economic effects of President Vladimir Putin’s brutal invasion of Ukraine.

A host of western corporates pulling out of Moscow, a severe depreciation in the rouble and sharp supply and demand imbalances has sent inflation in the country soaring.

Russian firms have been scrambling to secure supplies of raw materials and crucial components which have been depleted by western firms slashing ties with Moscow, generating strong upward price pressures.

A collapse in the rouble in the immediate aftermath of the Kremlin’s invasion of Ukraine has fed inflationary pressures by making imports more expensive.

Prices in Russia are 16.7 per cent higher than they were a year ago, figures released yesterday revealed.

Higher prices are eroding the living standards of the Russian people, while fears about the health of the country’s financial system have sparked queues to form outside banks across the country as people rush to grab their savings.

The rouble has since recovered to trade at pre-invasion levels, mainly driven by capital controls keeping reserves in Russia and European countries continuing to buy Russian oil and gas supporting the currency. 

Despite the sharp rise in inflation, up from 9.15 per cent in February, Russia’s central bank slashed its key interest rate from 20 per cent to 17 per cent in a bid to hold up output.

Higher borrowing costs tend to douse down inflation by reining in demand.

The Russian economy could shrink as much as 15 per cent this year, according to calculations by the Institute of International Finance.

Russian companies have been front-loading purchases of resources in anticipation that future supplies could be choked off if the war rumbles on.

This has led to a sudden uptick in demand, which is rubbing up against low supplies and pushing up prices.

Inflation was “exceptionally strong in March due to a combination of a weak rouble resulting in [foreign exchange] pass-through, front-loaded purchases in anticipation [of] future shortages and supply disruptions,” analysts at Goldman Sachs said.

“Since Russia invaded Ukraine, the West was quick to impose major sanctions and Western companies decided to often voluntarily leave the Russian market, which essentially means that current inventories are not replenished (certain medicines, for instance), which in addition to the hoarding behaviour we observed in the early stage of the invasion, created significant price pressures due to scarcity,” they added.

Russian inflation is likely to cool in the coming months as a result of the demand that was brought forward to avoid missing out on resources dampening future demand.

“Supply constraints will ease over time with the rerouting and substitution of imports” helping to ease price pressures, Goldman added.