Putin's Ukraine Adventure Is Tanking The Entire Russian Economy
The decision comes as the country grapples with the impact of sanctions on the country over its policy towards Ukraine. Core inflation rose to 8% in August, well above its 5% target, driven by the "imposition of external restrictions."
Unhelpfully for monetary policymakers, these restrictions include sanctions on Western food imports that Russia imposed on itself as a tit-for-tat response. Officials estimate that it will add a percentage point to inflation this year.
The move will do little to reassure those worried about the flagging Russian economy. In its accompanying explanation for the decision, the central bank acknowledged that anemic growth in the country is being driven by a toxic combination of sluggish productivity, poor demographics and low investment due to weakening business confidence.
Over 2014 as a whole, the economy is expected to grow by a meager 0.4% and rise only 0.9-1.1% through 2015. And that is its base case scenario. If the problems in Ukraine intensify there is every chance that these estimates could be revised lower.
Self-inflicted stagflation is hardly the story Vladimir Putin will have envisaged when he reacted aggressively to Western sanctions. What it means in practice is that the Russian economy has once again become extremely vulnerable to the trajectory of oil prices - fossil fuels are its biggest export - if it is to avoid a recession.
If the oil price drops the country will lose its key support and all bets will off.
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