Due to rising demand, partially caused by large increases in military spending and ongoing pressure of a shrinking labor market, the Russian economy is "likely at risk of overheating," the U.K. Defense Ministry wrote on Nov. 6.
This will most likely ensure that inflation in Russia remains above the target level of 4%, which will probably "erode real terms government spending, particularly in areas such as social care with below-inflation spending rises," the ministry reported in its latest intelligence update.
"This further illustrates the reorientation of Russia's economy to fuel the war above all else."
According to the ministry, inflation in Russia increased from 5.3% in August to 6% the following month, driven by rising consumer prices, particularly for food and fuel.
In response, Russia's central bank has increased the base interest rate by 2% to a new base rate of 15%, the highest number since May last year.
This is highly likely to increase borrowing costs for Russian consumers and impact the government's debt servicing costs, the U.K. Defense Ministry concluded.
The Russian government reportedly plans a massive hike in defense spending in 2024, which should go as high as 6% of the country's gross domestic product (GDP), Bloomberg reported in September.
Reuters wrote in August that Russia doubled its defense spending for 2023 to over $100 billion after it spent 5.59 trillion rubles ($59 billion) on military expenditures already in the first six months.
Alexander Query
