Kyiv’s Strikes Battering Russian Economy Hang Over Rate Decision

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Or sign-in if you have an account.16]n(10kd3]71lfp63qhjv]0_media_dl_1.png Bank of Russia(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.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountUkraine’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. 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.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againThe 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. 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. 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. 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.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.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.”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. 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.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.What Bloomberg Economics Says…Rate hikes can’t repair refineries or produce fuel, but the central bank still has to contend with the gasoline shock. We expect a pause at the July 24 meeting, a materially higher projected-rate path and a signal that hikes remain possible if the shock feeds into broader inflation. That leaves monetary policy tighter for longer.Fiscal policy will feel the strain too. Higher rates raise debt-service costs, while faster inflation adds to spending pressure. For the Finance Ministry, an already difficult three-year budget round has become harder.— Ekaterina Vlasova, CEE & Russia economistThe central bank’s business-climate measure has turned negative amid rising fuel costs, hitting its lowest level since May 2022. Alexander Shokhin, the head of Russia’s largest business lobby, warned that keeping the key rate unchanged on Friday risks “autumn bankruptcies.” Russian financial markets have also come under pressure. The benchmark MOEX Russia Index fell earlier this month to its lowest level since October 2022, while the Finance Ministry halted bond auctions for the first time since 2022 amid a slump in the domestic debt market.“Rising inflationary risks linked to the fuel crisis are raising concern that the key-rate easing cycle may be coming to an end,” Alfa-Bank analysts wrote in a note earlier this week. “The prospect of a reversal in monetary policy is growing, adding pressure on long-dated government bonds and equities.”Fiscal policy poses another challenge, with spending already running ahead of government plans as military procurement accelerates.Meanwhile, Kyiv has expanded its strikes beyond Russian energy and industrial infrastructure in response to Moscow’s missile attacks. Ukrainian drones over the weekend set warehouses belonging to Wildberries, Russia’s largest online marketplace, ablaze, causing billions of rubles in losses and threatening hundreds of small businesses.A sustained campaign targeting retail infrastructure could further curtail productivity and ultimately feed into higher consumer prices. Still, policymakers expect the economy to return to growth in the second quarter after contracting in the previous three months. Increased government spending and resilient consumer demand continue to support activity, and wages are still rising. The risk of knock-on effects from higher fuel prices, combined with demand that remains strong, outweighs slowing economic growth and the sharp deterioration in business sentiment, said Andrei Melaschenko, an analyst at Renaissance Capital in Moscow. He expects the Bank of Russia to leave rates unchanged.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.