On 24 July, the Board of Directors of the Central Bank of Russia (CBR) will meet to decide whether to change the country’s key interest rate. Under ordinary circumstances, such a decision would attract little attention beyond financial markets. Today, however, it could shape not only the trajectory of Russia’s economy but also the Kremlin’s ability to sustain its war in Ukraine.
The meeting has become the focus of unusually intense public interest. Businesses, investors and ordinary Russians alike understand that the outcome will offer a glimpse of the country’s economic future. If the Central Bank keeps interest rates high—or raises them further—it will continue to restrain inflation. That, in turn, limits the government’s ability to finance rapidly rising military expenditure through monetary expansion. With budget revenues stagnating and the costs of the war steadily increasing—particularly after Ukraine’s increasingly effective drone strikes against Russian logistics and energy infrastructure—the Kremlin is running out of inexpensive ways to pay for the conflict.
A lower interest rate would provide temporary relief by making credit cheaper and allowing the government to expand spending more aggressively. Yet it would also risk unleashing inflation, accelerating capital flight and undermining confidence in the financial system. Social unrest is also something to reckon with. At the centre of this dilemma stands one person: Elvira Nabiullina, the governor of the Central Bank, whose determination to preserve monetary stability has increasingly put her on a collision course with those in Moscow who believe the war must take precedence over economic discipline.
Maintaining high interest rates alone will not force Vladimir Putin to end the war in the immediate future. The Kremlin still possesses considerable financial reserves and continues to believe that military success remains attainable. Putin appears convinced that Russian forces can eventually exhaust Ukraine’s defences and complete the occupation of the Donbas—a prediction repeatedly offered by his generals.
Time, however, is becoming an increasingly important variable. Russia’s military campaign requires an uninterrupted flow of money, and several Russian economists estimate that existing financial resources could come under severe strain within six months. Should battlefield expectations once again fail to materialise while fiscal pressures continue to mount, the Kremlin may eventually have little choice but to consider a negotiated ceasefire.
One reason Russia has avoided runaway inflation despite unprecedented wartime spending is Nabiullina’s unwavering commitment to orthodox monetary policy. She has consistently resisted demands for substantial interest-rate cuts, arguing that inflation remains the greatest threat to long-term financial stability. A sharp reduction in the key rate would almost certainly accelerate capital outflows, already increasing in recent months, while encouraging wealthy Russians to move their savings out of the banking system.
Ironically, many of those calling for lower rates would themselves become victims of the financial instability that would follow. Throughout her tenure, Nabiullina has adhered to one principle above all others: the Central Bank’s foremost responsibility is to preserve price stability. Were she to abandon that principle under political pressure, financial markets would interpret it as evidence that the Central Bank had lost its independence. Even many critics of her monetary policy acknowledge that she remains the single most important guarantor of Russia’s financial stability.
Nabiullina has always faced many opponents who favoured her removal under the pretext of unleashing economic development (see box: Who Wants Nabiullina Gone).
FACTBOX: Who Wants Nabiullina Gone
Four broad camps within the Russian elite favour her removal, each for different reasons.
Heavy industry and agriculture — machinery, farming and steel producers depend on cheap credit, which low inflation rules out under Nabiullina. Roughly a hundred Duma deputies, mostly from the Communist Party and “A Just Russia,” are aligned with this camp; it has no direct representation in government.
Commodity exporters — coal, metals and fertiliser producers no longer need Western financing after losing access since the invasion, so they now favour higher inflation instead: it shrinks their ruble-denominated domestic costs and boosts export earnings. This camp is well represented in the ruling “United Russia” faction and across most state institutions outside the security services.
Militarization hardliners — industrialists and senior officials who want Russia fully self-reliant industrially, to sustain a long confrontation with the EU under the banner of “traditional values.” They see the inflation rate as secondary as long as the state controls economic and political behaviour, and this camp holds sway over much of state television. Rosneft’s Igor Sechin is thought to share this outlook but, as one of the most powerful men in Russia, needs no allies.
The military-industrial complex — senior army officers and defence-industry executives want higher state spending and accept the resulting inflation as a necessary cost of sustaining the war effort.
Dmitry Belousov, the younger brother of Defence Minister Andrey Belousov, published a report on inflation and anti-inflation policy. He argued that the key rate can no longer reduce inflation, since inflation is now driven by other factors. He is considered a thoughtful economist, but in this case he is perceived as one favouring his family’s interests first.
During Nabiullina’s notable absence from public life in early June, a new law was suddenly and quickly passed by parliament allowing the government to increase domestic debt without any limits or restrictions.
Russia’s low level of foreign debt maintains the illusion among loyalists that the Russian economy does not suffer from a shortage of financial resources. It’s the other way around — financial resources are in great demand. Russia’s corporate debt is extremely high. It was reported on 17 July that it has exceeded $1.3 trillion, half of which sits with large state-owned corporations. They are struggling to service the debt and rely on state-subsidized credit. The CBR has kept trying to restrict those subsidies. If the key rate is cut, the state-owned corporations will benefit from it regardless. If large corporations receive neither state subsidies nor cheap credit, they will face bankruptcy, leading to the collapse of huge segments of Russian industry. This could be avoided only if the government dramatically cuts military spending, which would consequently be felt on the battlefield.
At her recent press conferences, Nabiullina reiterated that the escalating state budget deficit was one of the most dangerous drivers of inflation. Even before the new law was passed, the budget deficit had reached 2.5% of GDP, thus exceeding the planned budget cap of 1.6%. Under the new law, the government can increase spending as it sees fit. There are already reports that the deficit’s growth has accelerated. If Nabiullina is to remain faithful to her policies, she may have to choose between compromising and leaving.
Putin announced on 12 July that the rate would be trimmed. Perhaps Nabiullina can buy time with a merely symbolic cut on 24 July, as she did before (on 22 June the rate went down from 14.5% to 14.25%).
As the moment of truth draws near, the sacking of Nabiullina may come to the fore. Her mysterious absence in early June is believed to be a result of her earlier refusal to let inflation rise. Reportedly she threatened to resign, and Putin chose to compromise.
Furthermore, there are signs that Putin is weighing a negotiated peace as an option. Andrey Melnichenko, perceived as one who has Putin’s ear, published an article in The Economist calling for restoring ties between Russia and the West once an agreement on Ukraine is reached. Putin has not abandoned his plan to occupy all of Donbas, but the option of ending hostilities is now on the table as well.
The continuation of the war is not the only question. In the Economist article — largely ignored by Russia’s propaganda machine — Melnichenko proposed basing relations between Russia and the West on principles that can hardly be reconciled with Putin’s demands just before the invasion. Had the article been Melnichenko’s own initiative, he would already have been accused of treason on every pro-regime TV channel. One of the main goals of the war against Ukraine was to intimidate the EU into accepting Russia’s terms for economic cooperation and acknowledging Russian dominance over the post-Soviet space. That no longer seems to be the point.
Russian exports have severely suffered due to the loss of the European and Japanese markets. The sanctions imposed on Russia, on the other hand, force exporters to sell below market price to compensate buyers for the risk involved. The only alternative appears to be a substantial rate cut in order to reduce exporters’ domestic costs through inflation.
Oleg Deripaska, an oligarch with ties to the Kremlin dating back to the Yeltsin era, said in a speech at the St. Petersburg International Economic Forum that Russian exporters needed a “single-digit key rate” to keep operating.
German Gref — chairman of Sberbank’s board, Russia’s largest bank, and a former minister of economic development who worked alongside Nabiullina for many years — urged her to cut the interest rate during a public discussion the two of them took part in.
The Kremlin still has the political will to continue the war. What it increasingly lacks is the economic room to do so. As long as Elvira Nabiullina refuses to sacrifice monetary stability, every month of high interest rates narrows Putin’s options. Eventually, the Kremlin may have to choose between financing the war through inflation and preserving the financial system that keeps the Russian state functioning. That choice—not events on the battlefield alone—may ultimately determine when serious negotiations become possible.
