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The boss of Russia's biggest bank said the country's economy is 'definitely and strongly overheated'

Huileng Tan   

The boss of Russia's biggest bank said the country's economy is 'definitely and strongly overheated'
  • Russia's economy is "definitely and strongly overheated," said Sberbank CEO Herman Gref.
  • Gref said it's "impossible" to exceed the current production capacity, which is at 84%.

Russia's economy appears to have an intensifying issue following more than two years of war with Ukraine: It's overheating.

Herman Gref, the CEO of Sberbank — Russia's largest bank by assets value — said the country's economy is "definitely and strongly overheated," TASS state news agency reported on Tuesday.

Gref, who was speaking in parliament, said production capacity was at a historically high level of 84%. He added it's simply "impossible" to cross this production capacity threshold and produce even more.

At first glance, Russia's economy appears unusually resilient despite the West's sweeping sanctions. It posted 3.6% GDP growth last year.

However, reports from Russia suggest the country's economy is primarily driven by wartime activities that generate demand for military goods and services, subsidies that steady the economy, and sharp policy-making.

Rosy GDP figures alone are not a good measure of economic performance during wartime since weapons and munitions don't better the quality of life for Russians or contribute to future economic growth, Sergei Guriev, a former chief economist at the European Bank for Reconstruction and Development, said in January.

Gref was speaking in the context of Russia's central bank's tight policy. Its key interest rate at 16%. He said the central bank is pursuing a rational policy and that the economy must weather the current high-interest rate cycle, even though it is "unpleasant."

"There is no other way. We know approximately when rates were not raised for political reasons, and then how it ended," he said, referencing Turkey. The Turkish central bank has hiked interest rates all the way up to 50% to deal with persistent runaway inflation.

Gref's concerns echo those of Elvira Nabiullina, Russia's top central banker, who issued a warning in December that the country's economy was at risk of overheating.

Russia's labor crisis

Russia's inflation is in part due to a labor crisis. Its war in Ukraine is siphoning manpower away from its economy.

Russia's unemployment rate hit a record low 2.6% in April, while real wages jumped nearly 13% in March from a year ago due to an ongoing labor crunch, official data shows.

The manpower crunch has gotten so bad that the Russian military is now offering sign-on bonuses and salaries that are so competitive that even the country's lucrative oil and gas industry isn't keeping up.

This, in turn, contributes to price hikes. Russia's inflation rate stood at 8.17% from May 28 to June 3 — up from 8.07% a week earlier.

Russia's central bank is slated to announce its next interest rate decision on Friday.

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