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The Russian economy is “absolutely and strongly overheated,” said Herman Gref, CEO of Sberbank.
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Gref said it is “impossible” to exceed the current production capacity, which is 84%.
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Russia’s sanctions-hit economy grew by 3.6% of GDP last year, driven by wartime activity.
After more than two years of war with Ukraine, the Russian economy seems to have an increasing problem: the economy is overheated.
Herman Gref, the CEO of Sberbank – Russia’s largest bank by asset value – said the country’s economy is “absolutely and strongly overheated”, state news agency TASS reported on Tuesday.
Gref, speaking in parliament, said production capacity was at an all-time high of 84%. He added that it is simply “impossible” to exceed this production capacity threshold and produce any more.
At first glance, Russia’s economy appears unusually resilient, despite sweeping sanctions from the West. Last year the country achieved GDP growth of 3.6%.
However, reports from Russia indicate that the country’s economy is driven primarily by wartime activities that generate demand for military goods and services, subsidies that stabilize the economy, and sharp policymaking.
Rosy GDP figures alone are not a good measure of wartime economic performance, as weapons and ammunition do not improve Russians’ quality of life or contribute to future economic growth. Sergei Guriev, a former chief economist at the European Bank for Reconstruction and Development said in January.
Gref spoke in the context of the Russian central bank’s tight policy. The main interest rate is 16%. He said the central bank is pursuing rational policies and the economy should weather the current cycle of high interest rates even if it is “unpleasant.”
“There is no other way. We know approximately when interest rates were not raised for political reasons, and how that ended,” he said, referring to Turkey. Turkey’s central bank has raised interest rates to 50% to tackle persistently runaway inflation.
Gref’s concerns echo those of Elvira Nabiullina, Russia’s top central banker, who warned in December that the country’s economy was at risk of overheating.
The Russian labor crisis
Russia’s inflation is partly due to a labor crisis. The war in Ukraine is draining manpower from the economy.
Russia’s unemployment rate hit a record low of 2.6% in April, while real wages rose nearly 13% in March from a year ago due to a persistent labor market tightness, official data showed.
The manpower shortage has become so bad that the Russian military now offers sign-on bonuses and salaries so competitive that even the country’s lucrative oil and gas industry can’t keep up.
This in turn contributes to price increases. Russian inflation was 8.17% from May 28 to June 3 – up from 8.07% a week earlier.
The Russian central bank will announce its next interest rate decision on Friday.
Read the original article on Business Insider
