Kyiv’s Strikes Battering Russian Economy Hang Over Rate Decision

16]n(10kd3]71lfp63qhjv]0_media_dl_1.png Bank of Russia

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(Bloomberg) — Russian businesses are grappling with the bleakest conditions since the early months of the war on Ukraine, putting the central bank in a bind as it weighs a pause in its yearlong easing cycle that would prolong punishing borrowing costs.

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Ukraine’s increasingly frequent strikes deep inside Russia are placing mounting strain on the economy, driving up fuel and transportation costs that are squeezing companies and threatening already sluggish growth. 

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That leaves policymakers, who have struggled to contain inflation throughout the war, facing a grim choice Friday between delivering a token 25 basis-point rate cut and leaving borrowing costs unchanged at 14.25% — the first pause since they began easing in June last year. Economists surveyed by Bloomberg are evenly divided between the two outcomes.

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The bank will announce its decision at 1:30 p.m. in Moscow, with Governor Elvira Nabiullina scheduled to give a briefing at 3 p.m. 

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Price growth has accelerated sharply in recent weeks. Current inflation, after adjusting for seasonal swings, jumped to 10.6% in June in annualized terms, from 2% a month earlier, according to the Bank of Russia. The pickup was driven largely by surging fuel prices after waves of Ukrainian drone attacks on oil refineries across Russia. 

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Gasoline prices increased 20% in June from a year earlier, data from the Federal Statistics Service show. Weekly inflation figures this month indicate companies have begun gradually passing higher fuel costs through to consumers, the central bank said. 

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Deputy Governor Alexey Zabotkin warned that rate setters “cannot turn a blind eye” to the fuel crisis, even as they expect government measures to stabilize the market. The central bank is watching for a spillover into the prices of other goods and services through higher costs and shortages that constrain production capacity, he said.

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Kyiv has been carrying out almost daily strikes on Russian energy assets, and the economic impact is already visible. Russia’s oil-processing rates in the first half of July fell to their lowest level in more than two decades, according to EA Analytics.

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The damage to refineries has weighed on wholesale trade and freight transportation, according to the Bank of Russia’s latest economic trends review, which also warned of “potentially subdued business activity in the coming months.”

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The government and regional authorities say conditions are improving. However, Nabiullina stressed after the previous policy meeting that policymakers were closely watching how problems in the fuel market feed into inflation expectations. 

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Those concerns were among the reasons the central bank halved the size of its rate cut to 25 basis points at its last meeting. Since then, household inflation expectations jumped to 14.7% in July, the highest level since Russia’s invasion of Ukraine began.