Vladimir Putin is in a painful economic bind

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Subscribe to enjoy similar stories. Most central banks are cutting interest rates. Not Russia’s.

Last month policymakers raised rates to 21%, a two-decade high; markets expect them to reach 23% by the year’s end. The shift is all the more unusual as it is happening at a time of war, when central bankers are normally loth to supress economic activity. Russia’s economy has confounded analysts since the country invaded Ukraine in February 2022.

Despite facing one of the tightest sanction regimes in modern history, it has undergone its fastest expansion in more than a decade. Russia enjoyed growth of 3.6% last year and is expected to maintain such a pace this year. Yet rather than being a demonstration of strength, the central bank’s decision to lift interest rates is a warning of trouble to come.

Government outgoings are increasingly difficult to sustain. Russia’s budget, unveiled in September, included a plan to increase defence spending by a quarter next year. Taken together, annual expenditures on defence and security—a separate budget item that covers the intelligence services—are now expected to rise to 17trn roubles ($170bn), an amount representing more than 40% of all government spending or 8% of Russia’s GDP.

Defence spending alone will be 6% of Russian national income, the most since the cold war. That is a lot, but not unusual for a country at war. America’s defence spending, for example, was 8-10% of GDP during the Vietnam war.

During the second world war the great powers devoted 40-60% of their total economic output to military ends. The crucial difference is to be found in monetary policy. British policymakers in the early 1940s endeavoured, and mostly succeeded, in fighting what they termed “a 3% war", keeping