Russian Economic Stability at Stake: Sberbank Warns of Potential Overcooling Challenges

Russia’s economy faces significant risks of excessive cooling due to a prolonged period of elevated interest rates, and there are concerns about its ability to return to a growth trajectory, according to a senior executive at Sberbank, the country’s largest bank.

“There is a threat of the economy experiencing too much cooling, which might hinder our ability to recover from this downturn, resulting in limited growth potential,” Sberbank’s First Deputy CEO Alexander Vedyakhin told Reuters on Wednesday.

He estimated that Russia’s GDP would grow by only 1 to 2% this year, which is below the government’s forecast of 2.5%.

This month, Russia’s Central Bank reduced its key interest rate from a historic peak of 21% to 20%, aiming to manage inflation stemming from an overheated wartime economy while also responding to increasing political pressure to lower borrowing costs.

“I believe the Central Bank’s key rate could settle around 17% by the year’s end. However, I don’t expect a drastic reduction in rates due to the risk of renewed inflation,” Vedyakhin stated.

He emphasized the need for more substantial rate cuts to spur economic recovery, suggesting, “A savvy investor with such EBITDA margins could initiate new projects. I think a rate below 15%, approximately in the 12-14% range, would be a suitable level for the economy to begin recovering, growing, and progressing.”

Additionally, Vedyakhin highlighted what he considers an overvalued ruble, attributing its strength to high interest rates, a weakened domestic foreign exchange market, logistical challenges, payment complications, and foreign currency sales from the fiscal reserve.

“Our analysts believe that the ruble is currently overvalued. If conditions were more balanced, considering current oil prices and macroeconomic factors, it should be around 90-95 rubles per dollar,” he noted.

These comments coincide with concerns voiced by senior officials regarding the country’s economic direction.

Kremlin Deputy Chief of Staff Maxim Oreshkin recently stated that Russia’s existing growth model has reached its limits and advocated for a transition to a more advanced technological and organizational framework.

President Vladimir Putin has also recognized the trend of economic cooling, urging government officials to proceed cautiously to avoid “excessive cooling, akin to being in a cryochamber.”