Sky-high interest rates are strangling the Russian economy's vitality
In recent times, Russia has maintained exceptionally high interest rates, with the Bank of Russia holding its key rate at a record high of 21% as of April 2025, before slightly reducing it to 20% in June 2025 [1][2][3]. This historically high level reflects ongoing inflationary pressures and economic challenges, including the impact of Western sanctions and geopolitical tensions.
The high interest rate policy is aimed at controlling inflation, which, while easing, remains elevated at around 10.3% in early 2025, with a target to return to 4% by 2026 [1][2]. Despite the easing inflation, the Bank of Russia projects economic growth to be modest, around 1%–2% in 2025, indicating a sluggish recovery and cautious optimism as the economy "gradually returns to a balanced growth path" [1][2][3].
Businesses have expressed that high borrowing costs are stifling investment and economic growth, as the expensive credit environment limits expansion and capital expenditures [3]. The Kremlin's increased military spending has provided some economic stimulus through defense sectors, but this growth is uneven and does not fully offset the broader slowdown imposed by monetary tightening and sanctions [3].
While direct data on bankruptcies was not presented in recent sources, high-interest rates typically increase financial distress for companies, particularly small and medium enterprises (SMEs) dependent on borrowing. Elevated borrowing costs increase the risk of insolvencies as companies struggle with debt servicing, especially in a constrained economic environment with limited growth prospects [3].
The economic outlook for Russia is marked by heightened risks of bankruptcies and financial instability for firms under economic pressure [5]. The central bank plans to keep rates tight for an extended period until inflation normalizes, which may prolong these economic challenges.
Meanwhile, Eastern and Southeast European countries such as Bulgaria, Croatia, and Lithuania can expect noticeable economic growth [4]. The economic growth in these countries is mainly due to private consumption. Many countries in this region will grow more strongly in 2025 and 2026 than the Eurozone.
Ukraine's economy is also facing challenges. The destruction of critical infrastructure by Russian attacks has left deeper scars, according to Ukraine expert Olga Pindyuk of the think tank [6]. The worsening labor shortage due to mobilization for the war is also weighing heavily on Ukraine's economy. Additionally, Ukraine's expected poor harvest due to drought is affecting the economy. The Institute revised its growth forecast for Ukraine in 2025 down by 0.5 percentage points to 2.5% [4].
Poland's economic growth is expected to be 3.5% in both 2023 and 2024 [4]. These countries will continue their economic catch-up process with Western Europe.
Sources: [1] The Moscow Times, "Russian Central Bank Raises Key Rate to 21%," 2025 [2] Reuters, "Russian Central Bank Lowers Key Rate to 20%," 2025 [3] Bloomberg, "High Interest Rates Stifle Investment in Russia," 2025 [4] The Financial Times, "Eastern Europe Poised for Strong Growth," 2025 [5] BBC News, "CEO of Russia's Largest Bank Warns of Tough Times," 2025 [6] The Kyiv Independent, "Ukraine's Economy Struggles Amid War and Infrastructure Destruction," 2025
- The high interest rate policy implemented by the Bank of Russia, a part of the broader employment and community policy, is causing financial strain for businesses, particularly small and medium enterprises (SMEs), as expensive credit environments limit expansion and capital expenditures in the industry, increasing the risk of insolvencies and exacerbating financial instability.
- In contrast, Eastern and Southeast European countries, such as Bulgaria, Croatia, and Lithuania, are experiencing noticeable economic growth, primarily driven by private consumption, with these countries projected to grow more strongly in 2025 and 2026 than the Eurozone, demonstrating a success story in the general news sector that differs from the economic challenges faced by Russia.
- As Russia grapples with ongoing economic challenges, including the aftermath of Western sanctions and geopolitical tensions, as well as the economic impact of war-and-conflicts such as the ongoing conflict in Ukraine, beyond the central bank's strategies for controlling inflation and growth, it is essential to consider broader policy interventions, like employment and community policies, aimed at supporting SMEs and promoting job creation to stimulate private sector growth and longer-term economic stability.
