The Central Bank of Russia (CBR) is worried that the Russian economy is overheating due to high levels of investment and rising consumption in a very tight labour market, the bank said in its monthly update.

The temperature is rising thanks to increased consumer spending, private investment focused on import substitution to replace missing goods following an exodus of foreign companies and their brands, as well as rising strong consumer demand as consumers go back to buying bigger ticket items after the dislocation caused by the imposition of Western sanctions. At the same time, supply is struggling to keep up with rising demand, posing a risk of overheating, according to the Central Bank's analysts.

The rise in consumer demand is attributed to higher salaries resulting from a labour shortage and reduced uncertainty. In such circumstances, people tend to spend more rather than save. For instance, residents in Russia's Central Federal District have been observed spending more on durable goods like furniture and household appliances in the past few months. The reopening of stores under Russian ownership, previously operated by Western brands, has also contributed to this consumer revival.

Private sector investment is also increasing, supported by state financial assistance aimed at promoting import substitution and the establishment of repair facilities and critical component manufacturing. This strategy mirrors the approach taken by Russia's private sector during the Covid-19 pandemic. Many businesses are replacing equipment on a large scale as they adapt to new markets and suppliers.

State orders have also played a role in driving growth. However, their impact on the total supply of goods and services for private consumption and investment is indirect, creating new business opportunities such as state infrastructure projects.

As a result, intense competition for resources, including labour, production capacity and financial resources, is evident within the economy. The record-low unemployment rate, near-full utilisation of production capacity, and high corporate borrowing rates reflect this competition.