International Economics: IB Economics

The Bank of Russia has surprised many with a 2% rise in interest rates as the central bank looks to reduce inflation, although Russian inflation is lower than UK inflation at 6%, and its inflation target is higher, 4% - something that I didn't know and will now add to my teaching.

However, a bigger problem has been the depreciation of the rouble, which is now trading at more than 100 to the dollar, and will continue to fuel inflation.  

Yesterday's most interesting story revolved around the Russian monetary authorities raising interest rates by 3.5%, from 8.5% to 12%, in the hope of stopping the depreciation of the rouble. 

The problem is that this seems to be short-termist solution,  with Russia experiencing a range of problems, notably 7% inflation - above the 4% target - and the strains of high levels of spending on the war in Ukraine.  

Whither the Russian economy. Or should that be wither.

This BBC report looks at the state of the post-conflict Russian economy and highlights the fact that, superficially, things don't seem so bad - the rouble has returned to pre-war levels, and inflation isn't significantly above the rest of the G7. 

However, supply chain disruption is starting to bite, and it's suggested that the real effects of sanctions are only just starting to take hold - you might think about how this might affect an AD-AS diagram showing the state of the Russian economy and the likely implications for macroeconomic objectives in the longer term.

The Russian rouble has collapsed in early trading, reaching a record low and likely to rapidly precipitate higher inflation. As a result, the Russian central bank has more than doubled interest rates - from 9.5% to 20%. 

It will be fascinating to see how things evolve. Early signs are that there is already pressure on Russia's banks. and the fear is that given the misinformation in the Russian media, it will be the most vulnerable who are adversely affected, unable to get their money out of banks as its value collapses. 

It seems as though the Russian government are going to impose capital controls and make the rouble less convertible, in an attempt to shore up its value. 

The rouble has lost 26% of its value this year, and this boosts inflationary pressure in the economy, mainly by making imports more expensive. 

However, capital controls are a last resort, and fail to deal with the underlying issues that have caused the depreciation in the first place. 

The rouble has fallen to its lowest level since April 2022, which signals the weakness of the Russian economy, and perhaps foretells ongoing problems with inflation. 

Faisal Islam writes about the purpose of sanctions on Russia, seeing their purpose as removing the ability of the Russian central bank to support its currency, and weaken the Russian economy, making it clear that the blame for the current set of circumstances lies with one man.