Putin Confronts Financial ‘Waterloo’ Risk to Choke Off Inflation

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As Russia’s central bank prepared to lift interest rates last week, an executive at a top state lender warned policymakers were confronting no less than their “Waterloo” — a battle with inflation whose outcome would prove momentous for the country’s financial institutions and markets.

The eventual hike was double the forecast of most economists, a decision that left Russia with one of the world’s highest rates when adjusted for inflation. It marked the culmination of a shift in official thinking over the risks of a price spiral, according to people familiar with the matter, as looming presidential elections stretch spending commitments already swollen by Russia’s war in Ukraine.

Four steps into a tightening cycle that doubled the key rate to 15% and included an emergency decision in August, the Bank of Russia could cap off the year with an increase of up to a percentage point next month if inflationary risks don’t subside, said the people, who requested anonymity to speak about deliberations that aren’t public.

For President Vladimir Putin, the emerging priorities mean the central bank is getting a free hand with rate increases that are likely to be punitive for businesses and households.

While threatening to inflict a recession on the economy, it’s the price of a war budget engineered for “the task of ensuring victory,” in the words of Finance Minister Anton Siluanov. It’s set to allocate more on the military than toward any other single item next year — a splurge that’s kept the ruble under pressure and briefly pushed it past the symbolic 100 per dollar threshold.

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To spell out the risk the central bank faced by hiking rates in October, Dmitriy Pianov — deputy president of Russia’s second-largest lender VTB Bank PJSC — invoked the famous battle that led to Napoleon’s defeat.

“Just…