Russia’s central bank (CBR) maintained interest rates at its record 21% on Friday, as key insiders say the country’s inflation-ravaged economy is a “disaster”.

The bank had been expected to raise rates even further as policymakers in Russia struggle to get prices down. Annual inflation hit 9.5% as of December 16, the bank said on Friday.

Raging inflation is being driven by the billions the Kremlin is pumping into military industries as its invasion of Ukraine grinds on, triggering a rapid rise in wages.

As the conflict continues, companies outside the defence sector aren’t able to attract workers without markedly increasing wages themselves, and have to charge more for products and services as result.

At his annual phone-in on Thursday, Russian President Vladimir Putin himself acknowledged that the level of inflation was problematic, as well as “a certain overheating of the economy”.

But he vowed that the Russian government and central bank “are already tasked with bringing the tempo down”.

One former senior Russian official, speaking to the The Financial Times, suggested that despite Putin’s boosterism, it’s clear that Russia is in a vexed position financially.

“He can hang on for two or three years like this,” the unnamed official said. “But he knows the economy can’t grow with these interest rates. It’s a disaster.”

The governor of the CBR, Elvira Nabiullina, has faced a wave of criticism from officials and oligarchs who claim her attempts to tackle inflation are stifling business as the economy labours under a raft of Western sanctions, the FT reports.

The central bank has been bullish, arguing it will raise the cost of borrowing to whatever level is neccessary to return the country to the 4% inflation target in the new year ahead.

Nabiullina was hailed as the saviour of the country’s economy as the sanctions bit following the full-scale invasion of Ukraine in February 2022.

She also notably steered Russia through the 2014 financial crisis that followed Russia‘s illegally annexing of Crimea.

Nabiullina’s past successes are said to have seen Putin maintaining faith in her, and continue to back her in private despite publically acknowledging the criticism she has faced, people who know them told the FT.

Herman Gref, the head of Russia‘s biggest lender, the state-owned Sberbank is among those urging the central bank “not to overdo the situation” amid the risk of stagflation, Bloomberg reports. Gref was replaced by Nabiullina as Economy Minister in 2007.

But Vladimir Potanin, said to be Russia‘s richest man, is among a small group that have backed Nabiullina in public, telling CBR that while high interest rates are uncomfortable for firms, they need to “be patient”.

With demand outstripping supply, the CBR has few options other than increasing interest rates to tackle inflation while the country also contends with low unemployment and weak productivity, as per The FT.