• Russia's central bank has kept the key interest rate at 21%, bucking expectations of a hike to 23%.
• Russia's top central banker said she is eyeing "excessive cooling" in the economy.
• Russia's high interest rates are impacting business investments and profits, business leaders complain.

Russia's economy has been running hot on wartime activities, prompting the country's central bank to hike rates up to 21% — but it's now worried about too much cooling.

Elvira Nabiullina, Russia's top central banker, expressed that concern on Friday when she kept the key interest rate unchanged. Analysts polled by Reuters had expected her to hike rates to 23%.

"Our politics is aimed at prevention of extreme scenarios, which means that we cannot let the economy overheat further," Nabiullina said at a press conference following the rates decision, according to TASS state news agency.

"It is necessary to make sure that overheating subsides. That said, it is necessary to avoid excessive cooling, which is why we keep a close eye on this," she said.

Nabiullina said the central bank kept the interest rate steady as monetary conditions have "tightened even more than was implied by the key rate increase" in October, when the bank raised the rate from 19% to 21%. Russia started the year with its benchmark interest rate at 16%.

"Consequently, lending growth notably slowed down in November," she said. "We will need some time to assess how steady this deceleration in lending is and how the economy is adjusting to the new conditions."

Russian business leaders complain about high interest rates

Nabiullina's comments came as Russia's inflation hovered around 8% in the year to November, compared to the target rate of about 4%. Staples, like the price of butter and potatoes, have shot up this year. But the central bank's three straight rate hikes since June may be working, the top central banker signaled.

"Tough monetary conditions have evolved in the economy, which are to provide for inflation slowdown in coming quarters," she said, per TASS.

Russian business leaders have been complaining about the central bank's high interest rates, which they say are stifling business activities.

Sergei Chemezov, the CEO of the defense conglomerate Rostec, said in October that record-high interest rates were "eating up" the profit from the company's orders.

"If we continue to work like this, then most of our enterprises will go bankrupt," Chemezov said.

Economic cracks in Russia

Even Russian President Vladimir Putin on Thursday acknowledged that his country's economy is not in a good place — and he blamed the central bank and federal government.

The Russian leader said that the central bank could have used instruments other than interest rates to cool the economy and that the federal government could have worked with economic stakeholders to improve supply.

"There are some issues here, namely inflation, a certain overheating of the economy, and the government and the central bank are already tasked with bringing the tempo down," Putin said during his marathon annual press conference.

Price rises had been an "unpleasant and bad" outcome, he said.

Given the sweeping sanctions against Russia's economy, Nabiullina faces a challenging job to keep Russia's seemingly resilient economy going.

Economic cracks are emerging as the Kremlin focuses on shoring up its defense industry for its war in Ukraine — but at the expense of other sectors, Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center fellow wrote on Friday.

Prokopenko, a former Russian central bank official, wrote that growth momentum could stall next year, with social and fiscal challenges developing into crises around 2026.

• Russian President Vladimir Putin said the ruble's plunge to two-year lows was no cause for panic.
• The Russian currency hit its lowest level against the dollar since March 2022 this week.
• Analysts say Russia is under pressure from inflation, military spending, and falling oil prices.

Russians shouldn't stress about the ruble tumbling to two-year lows, Vladimir Putin said Thursday. Analysts told Business Insider there was plenty of cause for concern.

The Russian leader told reporters that the "situation is under control" and that "there are absolutely no grounds for panic," according to a Google translation of a report from the RIA Novosti news agency.

Putin attributed the ruble's fluctuations "not only to inflation but also to budget payments and oil prices," along with many seasonal factors.

The Russian currency traded at 114 to the dollar on Wednesday, its weakest level since March 2022, shortly after the Ukraine invasion began. It was about 84 in early August, meaning the currency has depreciated by 36% in under four months. A greenback was worth about 108 rubles on Friday.

Russia's central bank stepped in to shore up the floundering ruble on Wednesday. It suspended purchases of foreign currency on the domestic market for the rest of this year to reduce volatility.

A Wednesday headline in the state newspaper Rossiyskaya Gazeta read, "Panic attack for Russia's currency market." The Kommersant newspaper warned readers to "buckle up your rubles."

The ruble's latest plunge follows the US sanctioning Gazprombank, one of Russia's largest lenders. The restrictions limit the bank's ability to access global financial markets and handle energy payments.

Russia also fired a hypersonic missile into Ukraine last week after its opponent launched missiles at targets inside Russia for the first time. The escalation has raised concerns of further economic disruption.

A weakening ruble benefits Russian exporters by making their goods more competitive in global markets. But it threatens to accelerate inflation by raising the cost of imports, leaving sellers little choice but to increase their prices. Stubborn inflation has already spurred Russia's central bank to raise the main interest rate to 21%, the highest level since 2003.

The Russian economy has suffered from Western sanctions imposed since Putin's invasion of Ukraine, with energy revenue tanking by almost a quarter last year. Other countries, such as India, have snapped up Russian oil instead, tempering the impact of price caps and other penalties.

Mounting pressure on Russia

Robin Brooks, a senior fellow focused on the global economy and development at the Brookings Institution, posted on X that the ruble's collapse shows how vulnerable Russia is to sanctions.

He also said the European Union's reluctance to impose certain penalties might have staved off economic disaster in Russia.

George Pavel at the trading platform Naga.com told BI the ruble's dive had been driven by rising inflation and a widening budget deficit fueled by heavy military spending.

"Russia's economic path looks unsustainable barring major changes," he said, ticking off concerns such as slowing growth, stubborn inflation, a tight labor market, and the massive cost of the Ukraine war.

Brent crude is trading at just over $70 a barrel, and sliding oil prices pose an existential threat to Russia, said Kathleen Brooks, research director at XTB.

"Russian income is shrinking at the same time as defense spending is surging as the war with Ukraine enters a more intense phase," Brooks said. "While President Trump may go some way to ending the Russia-Ukraine war, his policy on energy and plans to get the US pumping even more oil could weigh on the oil price further in 2025, which is bad news for Russia."