Balancing Policy Medicine for an Ailing Economy
In the intricate world of economic policymaking, Russia presents a fascinating case study of a patient experiencing multiple chronic conditions simultaneously—persistent inflationary pressures, structural constraints, and external shocks from sanctions and global market shifts. The concept of "treat-to-target," borrowed from medical practice where treatments are aggressively tailored to achieve specific biological markers, offers a compelling framework for examining Russia's economic policy challenges.
This approach raises critical questions: Can Russia's economic ailments be managed through a precise, target-driven approach to monetary and fiscal policy? What happens when the medicine itself creates undesirable side effects?
Recent developments in the Russian economy reveal a complex diagnostic picture. The Bank of Russia has pursued an aggressive tightening cycle, raising key rates to 21% in 2024 to combat inflation hovering around 8-8.5% 2 . Meanwhile, economic growth shows signs of stalling, with GDP projections for 2025-2027 suggesting minimal expansion of 0.5-2.5% annually 2 4 .
21%
Bank of Russia's 2024 rate to combat inflation
8.5%
Current inflation rate above target
The treat-to-target concept originated in clinical medicine, particularly in managing chronic conditions like rheumatoid arthritis and diabetes. In this approach, clinicians identify specific, measurable treatment targets (such as blood sugar levels or inflammatory markers) and adjust therapies systematically to achieve these targets. The approach emphasizes continuous monitoring, treatment agility, and evidence-based adjustment to achieve optimal outcomes.
"When applied to economic policy, treat-to-target transforms into a framework where policymakers identify precise economic indicators and adjust policy levers to achieve these targets."
The application of target-based approaches in economics isn't novel. Inflation targeting regimes gained prominence in the 1990s and early 2000s, with central banks in numerous countries adopting explicit numerical targets for price stability. The International Monetary Fund has extensively documented and advocated for such frameworks .
However, Russia's experience with policy credibility has been mixed. The 1998 Russian crisis and the subsequent default revealed profound time inconsistency problems in policy commitments—where authorities deviated from previously announced courses of action, eroding market confidence 1 . Similar time inconsistency problems emerged during the 2008 global financial crisis 1 .
Russia's economy has been running a persistent fever of elevated inflation, with current rates substantially above the Bank of Russia's 4% target. After reaching 7.4% in 2023, inflation was projected to increase to 8.0-8.5% in 2024 before gradually declining to 4.5-5.0% in 2025 and eventually reaching the target in 2026-2027 2 .
Beyond inflation, Russia's economy faces deeper structural challenges that complicate any target-based approach. According to analysts at the Bank of Russia's Financial Congress, the factors that drove growth in 2022-2023 have largely been exhausted 6 .
| Indicator | 2023 (Actual) | 2024 (Forecast) | 2025 (Forecast) | 2026 (Forecast) | 2027 (Forecast) |
|---|---|---|---|---|---|
| Inflation (% year) | 7.4 | 8.0-8.5 | 4.5-5.0 | 4.0 | 4.0 |
| Key Rate (% p.a., yearly average) | 9.9 | 17.5 | 17.0-20.0 | 12.0-13.0 | 7.5-8.5 |
| GDP Growth (%) | 3.6 | 3.5-4.0 | 0.5-1.5 | 1.0-2.0 | 1.5-2.5 |
| Banking System Claims Growth (%) | 22.7 | 15-18 | 8-13 | 7-12 | 8-13 |
In 2024, the Bank of Russia conducted what amounted to a natural experiment in aggressive treat-to-target methodology. Facing persistent inflation significantly above target, the regulator implemented a series of policy interventions:
The key rate was raised by 5 percentage points between July and October 2024, reaching 21.0% per annum 2 .
The Bank significantly adjusted its projected rate path upward, communicating a commitment to maintained tightness 2 .
Additional measures were implemented to curb credit growth, particularly in household lending 2 .
The preliminary results of this policy experiment reveal both therapeutic benefits and significant adverse effects:
| Indicator | Pre-Tightening (H1 2024) | Post-Tightening (H1 2025) | Change |
|---|---|---|---|
| Key Rate (% p.a.) | 16.0 | 21.0 | +5.0 pp |
| Inflation (yearly, %) | ~8.2 | ~9.4 | +1.2 pp |
| GDP Growth (QoQ, %) | ~3.5-4.0 | ~1.4-1.8 | -2.1 pp |
| Corporate Lending Growth (%) | 17-20 | 9-12 | -8 pp |
| Household Lending Growth (%) | 12-15 | 1-4 | -11 pp |
Implementing an effective treat-to-target approach in economic policy requires sophisticated tools and instruments. Based on the Bank of Russia's framework and international experience, the essential toolkit includes:
| Tool Category | Specific Instruments | Function | Status in Russia |
|---|---|---|---|
| Monetary Tools | Key Rate | Primary instrument for influencing market interest rates and inflation | Actively used, effective but with limitations |
| Foreign Exchange Operations | Mitigate financial stability risks under floating exchange rate | Used selectively amid sanctions | |
| Communication Tools | Forward Guidance | Manage inflation expectations through signaling | Improving but challenged by credibility issues |
| Inflation Reports | Regular communication of assessment and outlook | Well-established, quarterly publication | |
| Fiscal Tools | Federal Transfers | Reduce regional disparities in public goods provision | Extensive use but limited convergence impact 7 |
| Tax Sharing Arrangements | Allocate revenues among government levels | Complex system with frequent adjustments | |
| Structural Tools | Productivity Programs | Address supply-side constraints (e.g., Labor Productivity project) | Implemented but limited effectiveness 6 |
| Competition Policies | Maintain market mechanisms to enhance efficiency | Challenged by sectoral fragmentation |
A fundamental challenge for Russia in implementing a consistent treat-to-target approach is the time inconsistency problem in economic policy. This phenomenon occurs when policymakers announce future policy actions to influence expectations but have incentives to deviate from these announcements when circumstances change 1 9 .
Russia has experienced several episodes of time inconsistency with significant consequences. During the 1998 crisis, market participants expected an IMF bailout based on Russia's "too nuclear to fail" status, but when this bailout didn't materialize, it triggered a widespread emerging market crisis 1 .
Russia's institutional environment creates additional challenges for consistent policy implementation. Policy prioritization often favors political objectives over economic consistency, particularly in the current environment of geopolitical tensions and sanctions 6 .
| Challenge Category | Specific Challenges | Impact on Policy Effectiveness |
|---|---|---|
| Credibility Issues | History of time inconsistency | Reduces policy transmission effectiveness |
| Unanchored inflation expectations | Requires more aggressive policy response | |
| Political Constraints | Geopolitical priorities | Diverts resources from economic objectives |
| Sectoral fragmentation | Creates unequal policy impacts | |
| Structural Limitations | Technological constraints | Limits supply response to demand changes |
| Labor market shortages | Creates wage-price spiral risk | |
| External Factors | Sanctions and restrictions | Increases costs and reduces potential growth |
| Global market segmentation | Creates imported inflation |
The question of whether Russia needs a treat-to-target initiative cannot be answered with a simple yes or no. Rather, it requires careful consideration of how standard policy approaches must be adapted to Russia's unique economic pathophysiology.
The evidence suggests that strict inflation targeting alone may be insufficient and potentially costly in terms of foregone growth. A successful treatment approach would likely require several adaptations.
Russia's economy stands at a crossroads in 2025. The aggressive monetary treatment of 2024 has produced initial signs of disinflation but at the cost of significantly weakened economic momentum.
"The crucial policy question is whether this treatment approach can be refined and sustained without causing unacceptable side effects."
As with medical treatment, the most effective economic policy regimen must be tailored to the patient's specific characteristics, history, and constraints. For Russia, this likely means developing a distinctly Russian approach to economic treat-to-target—one that acknowledges both economic fundamentals and the unique institutional and structural context in which policy operates.
References to be added here.