Russian President Vladimir Putin has publicly called for lower interest rates again, increasing the pressure on the Central Bank of Russia (CBR) as the Kremlin struggles to reconcile a slowing wartime economy with a fresh surge in inflation driven by the country's deepening fuel crisis. (chart)

Putin usually doesn’t comment on monetary policy and is committed to the complete independence of the central bank. During his two and a half decades in office Putin has almost never commented on monetary policy. He said nothing when CBR governor Elvia Nabiullina put through a massive 1000bp hike in the first week of the war with Ukraine taking rates to a crushing two-decade high of 21%.

But things are changing now as the Russian economic slowdown becomes increasingly painful, especially for the SMEs where things have deteriorated rapidly. For almost the first time the president has sided with big business and become increasingly vocal in support of faster rate cuts.

Speaking at a meeting with Aisen Nikolayev, the head of Russia's Far Eastern republic of Yakutia, Putin described a reduction in the key rate as a "natural process" dictated by the country's macroeconomic indicators, The Bell reports.

This was the second time in little more than a month that the president has publicly signalled his preference for cheaper money.

On June 10, Putin said that, given slowing inflation, "we have every right to expect a reduction in the key rate."

The Bank of Russia did cut rates at the last June 19 monetary policy meeting, but only by the smallest degree possible – an increment cut of 0.25 percentage points, bringing the rate down from 14.5% to 14.25%.

Business was hoping for a lot more. German Gref, the CEO of Russia’s banking giant Sberbank and former Economics Minister said earlier this year that rates need to fall to 12% or lower to spur an economic revival. In an exchange on stage this month, Nabiullina said that if rates were cut too fast it could boost inflation and lead to stagnation, or worse still, stagflation, calling it a “dangerous experiment.”

“Let’s try it,” Gref responded, encapsulating the feeling of many in the business lobby.

Interestingly, Putin’s comments on cuts, and Nabiullina’s debate with Gref both show how publicly the debate over rates and the state of the economy has become. It also shows just how strong Nabiullina's independence to set monetary policy remains. But if she caves at this month’s monetary policy meeting and cuts rates, even by a little bit, it would be a very worrying sign of the start of the decaying of that independence.

The lack of growth is one problem, but for many big businesses, the sky-high cost of borrowing is starting to be an existential threat to their livelihoods. Vedomosti reported last year on the “13 drowning men” – a group of Russia’s biggest companies that are facing a debt crisis as servicing their loans eats up all their profits. And that group has become bigger since then.

The Russian Union of Industrialists and Entrepreneurs (RSPP) that represents the oligarchs’ interests, has been ratchetting up pressure on the CBR to accelerate monetary easing. And they are getting more organised. The chairman of the RSPP, Alexander Shokhin, was recently appointed Russia’s new business ombudsman giving the informal lobbying group a formal status.

The next rate-setting meeting on July 24 is shaping up as a test of the central bank's independence. Nabiullina has been called the “most conservative central banker in the world” and is fiercely resisting calls for more rate cuts. Inflation has halved from a sticky 10% in 2025 to under 6% following her unorthodox experiment to bring price pressures down by cooling the economy. But she may have overdone it after growth went negative in the first half of this year.

Inflation pressures are back

At the same time inflation pressures are back, pushing inflation back above 6% to 6.02% in June from 5.31% in May. On a seasonally adjusted annualised rate, or SAAR, the June increase was equivalent to annual inflation of about 11–12% – far above the central bank's 4% target, The Bell reports.

A combination of food price inflation, a 200bp hike in the VAT rate that came into effect in January, and most recently petrol prices have surged thanks to Ukraine’s incessant bombing of Russia’s refineries caused a fuel crisis. A wave of Ukrainian attacks has pushed Russian refining runs to the lowest in more than 21 years. The uptick in inflation says that there is no room for another rate cut in July, however, many analysts believe that Nabiullina will cave into the pressure and make another token 25bp cut.

The fuel shock has become increasingly difficult for the Kremlin to contain. Russian petrol production has fallen to about 65% of seasonal demand following strikes that forced several major refineries to halt or curtail operations, according to industry estimates. The resulting daily shortfall has been put at 40,000–45,000 tonnes of fuel, against domestic consumption of roughly 115,000–120,000 tonnes a day. The Kremlin has organised imports of petrol from Belarus and Kazakhstan, but those are not enough to cover the shortfall.

The CBR and many economists argue that the jump in petrol prices is a one-off supply shock and the underlying inflationary pressures are still easing thanks to Nabiullina’s self-inflicted slowdown. The central bank said core inflation slowed to an average 4.2% SAAR in April and May, down from 6.2% in the first quarter. Nevertheless, she remains stuck between the clashing rocks of Scylla (rising inflationary pressure) and Charybdis (economic slowdown).

DoubleThink

The contradictory pressures on Nabiullina has led to the Kremlin to introduce a new vocabulary for talking about the economic problems, a version of George Orwell’s DoubleThink – holding two opposing views are true simultaneously, The Bell said in a commentary.

““A downturn is "restoration to health," and stagnation is "development." Russia’s new economic reality has spawned a new economic language designed not so much to describe what is happening as to reshape it,” The Bell wrote. “This verbal acrobatics did not originate as the private initiative of individual officials; the Kremlin and the government’s economic team systematically alter the language used to describe economic issues so that they no longer sound negative or alarming.”

The dispute over rates also highlights a broader problem for the Kremlin: how to talk about an economy that is clearly losing momentum without admitting that the wartime growth boom is running out of steam.

Russia’s extraordinary military Keynesian boom that followed the invasion of Ukraine in 2023 and 2024 is over as the economy is already running at full capacity, yet military spending continues to rise. As IntelliNews described it, Nabiullina is trying to land a plane where the throttle is stuck on full. Her solution for bringing down the plane (inflation) is a “soft landing” without putting the landing gear down. There was always going to be a lot of damage and Putin has been working very hard to insulate the Russian population as much as he can from the effects of war.

Russia's economy expanded rapidly in the second and third years of the war, as trillions of state spending poured into defence factories, military procurement and payments to soldiers and their families. But capacity utilisation is now over 80% -- the theoretical maximum. Growth slowed to about 1% in 2025 from 4.9% the previous year, while the economy contracted by 0.2% in the first quarter of 2026 before activity improved in April and May, The Bell reports.

Officials, but not Nabiullina, are reluctant to use words such as "recession", "stagnation" or even "slowdown". Instead, weakening growth is presented as a necessary cooling of an overheated economy or a return to a healthier and more sustainable trajectory.

For more than two years, the CBR has argued that the economy was operating beyond its productive capacity. Massive state spending collided with a chronic labour shortage, caused by the war, and sanctions-related supply constraints, pushing up wages, prices and inflation expectations.

Classical high interest rates have been the central bank's answer. But the same medicine is now throttling the civilian economy. Companies complain that borrowing at current rates makes investment all but impossible, while in the lower strata of Russian small business, revenues have plummeted and bankruptcies are inexorably rising after companies became trapped in a debt spiral in 2024 from which they can’t escape.

The banking sector is in the frontline of the economic miasma, where the situation is also deteriorating but is still far away from a crisis. The Banking sector is still making the same profits it did last year, but non-performing loans (NPLs) have risen to around 11% of the loan book.

According to the latest official Bank of Russia June data problem corporate loans are at about 11% of the corporate loan book, or RUB10.4 trillion, and unsecured consumer lending, the official NPL ratio was 13.1% as of April 1, according to the broadest definitions of NPLs.

That is worrying, but as 90% of the bad debt is already provisioned for, those debts do not threaten the system yet. Nevertheless, public confidence in the banking sector is falling, leading to an alarming spike in cash-withdrawals in March as Russians reverted to their classic crisis strategy: move your money from a bank to a banka, the Russian word for a glass pickling jar kept under the bed full of cash (preferably dollars, or these days, yuan).

Putin's comments are significant as it suggests that the Kremlin believes the balance of risks has shifted. Yet calling for lower rates is easier than delivering them. The fuel crisis has provided a vivid example of how the war can generate new inflationary shocks beyond the central bank's control – and thanks to the unstoppable military spending it was not in control in the first place. Ukrainian drones hitting a refinery can reduce petrol supplies, push up prices and ultimately influence a rate decision in Moscow.

The bottom line is the Kremlin can call a slowdown, a "restoration to health", and it can repackage stagnation as "development", but Nabiullina’s problem is she has to set the interest rates according to the numbers and annoyingly those are a simple mathematical reality.