Some Russians are spending like no tomorrow with 'considerable' overheating in the economy

• Russians are spending money freely, with consumption per capita surging over 20% from 2021 to 2023.
• The spending comes on the back of an overheated economy, with growth driven by wartime state spending.

Russia's economy is booming, and some people are spending generously, sending prices up.

Russia posted 3.6% GDP growth last year. The unemployment rate hit a record low of 2.6% in April, as men continued heading to the war's front amid a brain drain. The labor crunch has driven up wages, contributing to high inflation running over 9% on an annual basis — well above the official 4% target.

On Friday, the Russian central bank warned — yet again — of an overheating economy when it hiked rates from 16% to 18%in an attempt to rein in price gains.

"The GDP growth rates remained high in 2024 Q1 and Q2, while inflation was accelerating. This suggests that overheating in the economy has remained considerable," said Elvira Nabiullina, Russia's central bank governor, on Friday during her rate hike announcement.

Despite sweeping sanctions over its invasion of Ukraine in February 2022, Russia's economy hasn't broken down and even appears resilient, as it's now being driven by wartime state spending on military activities and subsidies.

Russians are traveling and spending on culture and hotels

The rate hike from Russia's central bank comes amid a spending boom in the country where many appear to be spending very freely, even amid the war and Western sanctions, as the Financial Times reported on Friday.

Overall, consumption per capita has increased by over 20% from 2021 to 2023, with spending on tourism a standout, surging over 90%, according to the FT's analysis of official data. Spending on culture, hotels, transportation services, and personal services has also jumped.

A resident in Moscow told the FT that her neighbor has been showing off photos of a pet lion.

"Everyone who is upper-middle class, they're just enjoying a really good life," Sergei Ishkov, a Moscow investor and entrepreneur, told the media outlet.

"Consumption is booming due to a combination of massive budget spending and labor force shortages leading to strong wage pressures," wrote Bartosz Sawicki, a market analyst at fintechConotoxia, in a Friday note.

But military spending, which is around 7% of GDP, is leading to "serious macroeconomic imbalances," Sawicki added.

Russia's central bank may hike rates again if necessary

Nabiullina said on Friday that Russia's GDP will grow 3.5% to 4% this year from a year ago. But next year, it's likely to slow to 0.5% to 1.5% year-over-year growth.

She added that the Russian central bank would keep its key interest rate high for as long as needed to bring inflation back to its target. If necessary, it could even impose more rate hikes to reduce economic risks.

"Labour force and production capacity reserves have been almost exhausted," said Nabiullina on Friday. "Shortages of these resources might cause a situation where the economic growth will be slowing down despite any attempts to boost demand."

Furthermore, any attempt to stimulate demand would only stoke even more inflation. That could create "a scenario of stagflation that could only be stopped by way of a deep recession," she warned, explaining the central bank's steep rate hike.

The central bank next meets on September 13.