The Russian economy is showing signs of strain due to high inflation and a tight labor market, G7 and European officials say, evidence that Western sanctions over the war in Ukraine are working.

Russia’s Central Bank, which is independent of the government, issued a fresh warning on Friday. The bank’s governor, Elvira Nabiullina, said the economy remained “substantially overheated” after members raised the key interest rate to 18 percent — the highest level in more than two years — and said annual inflation had risen to nine percent.

“To bring inflation down again, monetary policy needs to be tightened further,” the bank said in a statement, hinting at more rate hikes.

The rate decision came days after eight European finance ministers wrote in The Guardian this week that Russia was experiencing what they called a “re-Sovietisation of the economy”. They said reports of GDP growth, which the Kremlin cites as evidence that the economy is booming, only told one side of the story.

“If we look more closely at the signals, it becomes clear that not everything is as rosy with the Russian economy as Moscow would have us believe,” said the article attributed to the finance ministers of Sweden, Denmark, Estonia, Finland, Latvia, Lithuania, the Netherlands and Poland.

The ministers said Russia has had to rely on its liquid National Wealth Fund assets, valued at $55 billion by Russia’s Finance Ministry on April 1, to finance its war industry, which has become central to the nation’s economy. But Finance Ministry data shows the value has fallen nearly 50 percent from $104.7 billion before the war, Bloomberg reported.

The Bank of Finland reported in May that Russian spending and production in the military industrial sector have been significantly higher than in other sectors since 2022, “increasing economic imbalances and eroding Russia’s longer-term growth potential.”

Meanwhile, Moscow has imposed a ban on oil and sugar exports, as well as strict capital controls, to ensure domestic supplies and the preservation of private funds.

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These are all features of the Soviet economy, the ministers write.

“History clearly shows that this is not a successful strategy in the long run,” the article said.

“The short-term overheating of the economy, fueled by heavy investment in the war industry and severely limited access to technology, is likely to hamper productivity gains and result in private sector stagnation, further inflation and increasing pressure on Russian households.”

The ministers say this proves that sanctions – which target Russian assets abroad and the country’s ability to import and export goods and materials, including energy products and military components – are working and should be strengthened and expanded.

A Canadian finance ministry official, in an interview with Global News, pointed to other signs that “the Russian economy is in trouble,” including rising inflation. Russia’s central bank said Friday that inflation has risen from 8.6 percent in June to 7.4 percent in 2023.

Canada believes the sanctions are effective and will do “whatever it takes” to pressure Russia to end the invasion and “ensure Ukraine wins,” a spokesperson for Finance Minister Chrystia Freeland’s office said.

“These sanctions have financially cut Russia off from much of the global economy and are having a real and ongoing impact on the Russian economy,” Katherine Cuplinskas told Global News in an email.

Canada has imposed sanctions on more than 3,000 entities and individuals in Russia, Ukraine, Belarus and Moldova for their support for the Russian invasion, a spokesperson for Global Affairs Canada said.

“Canada will continue to implement economic measures in coordination with its partners, including the G7,” Charlotte MacLeod said in a statement.

The United States, United Kingdom and European Union have also targeted Chinese, Iranian and North Korean entities to address alleged sanctions evasion and material support for the war.

U.S. Treasury Secretary Janet Yellen said Thursday that the threat of U.S. sanctions against Russian financial institutions is hampering the country’s ability to obtain the goods it needs for its war against Ukraine.

Yellen also said she believes Russian revenues are being constrained by other sanctions and a price cap on Russian oil exports.

The G7 last month approved a plan that will use future earnings from frozen Russian assets in their countries to finance a $50 billion loan to Ukraine. Canada will contribute $5 billion to the plan, which Russian President Vladimir Putin described as “theft.”

The International Monetary Fund forecast this month that Russia’s GDP will grow 3.2 percent this year but fall to 1.5 percent in 2025.

Russia has managed to keep its economy afloat through strengthened trade, energy and security partnerships with countries including China, India, Brazil and Vietnam, despite pressure from Ukraine and its Western allies on those countries to cut ties with Moscow.

However, Western officials and experts say the continued focus on the Russian war machine leaves other sectors vulnerable.

In addition to inflation, Russia has been caught in a wage spiral, fueled by generous payments for volunteers fighting in Ukraine and defense workers. The country is also facing acute labor shortages in many sectors.

The workforce has turned to using teenagers, the elderly and even prisoners to fill the gaps. There are reports that some have been told that their work will allow them to avoid mobilization or imprisonment.

It is estimated that more than a million people have left Russia since the start of the war in Ukraine, either due to the partial mobilization of troops ordered in September 2022 or because young men fled the country to avoid conscription.

The central bank’s policies have helped Russia cushion the impact of sanctions, but critics say the regulator is hampering economic growth, which has just recovered to five percent.

Russian lawmakers on Thursday gave preliminary approval to a bill that would allow foreign banks to open branches in Russia, a move the Finance Ministry hopes will ease problems with cross-border payments.

International payments are a problem for Moscow after sanctions blocked major Russian banks from accessing the global payment system SWIFT.

“Settlements are the red thread of the economy,” Deputy Finance Minister Alexei Sazanov told lawmakers when presenting the bill, which passed its first reading in the State Duma, the lower house of parliament.

“Without settlements, the economy cannot function.”

— with files from Reuters