Volkswacht Bodensee - Russia signals slower rate cuts amid high Ukraine war spending

In the first quarter, the Russian economy contracted for the first time in three years as non-military sectors struggled under the weight of high borrowing costs and labour shortages.

"Economic growth continues at a moderate pace after a temporary decline at the beginning of the year," the bank said in a statement.

It signalled that rates might remain elevated for longer due to higher budget spending than previously expected over the next three years.

"The persistence of structural primary budget deficits until 2029 may require tighter monetary policy than stipulated by the baseline scenario," the central bank said.

Russia's budget deficit, which resulted from the Ukraine war, widened to nearly $80 billion in the first five months of this year, exceeding the level planned for all of 2026 by 60 percent.

Analysts on average expected a larger cut of the benchmark rate to 14 percent, according to a consensus compiled by business outlet RBC.

Ukraine has recently expanded its drone campaign against Russian oil refineries, ports and tankers, disrupting its gasoline market, with some petrol stations introducing rationing.

The bank's governor Elvira Nabiullina said at a press conference that higher gasoline prices were "one of the key factors" that influenced the decision to opt for a smaller rate cut.

Russia's business lobby had urged the regulator on Thursday to drop the rate to 13.5 percent to avoid having the economy "freeze" completely.

The central bank jacked interest rates to two-decade highs in 2024 as huge military spending on the Ukraine war sent inflation soaring.

Since last year, it has been modestly cutting the rate as the economy shows signs of losing steam.

But the high borrowing costs have hit businesses across the board, with large corporations laying off staff and seeking state aid, while some smaller businesses have been forced to close.

At Russia's flagship economic forum in Saint Petersburg earlier this month, President Vladimir Putin denied that the economy had "collapsed", saying it had simply "descended to the same level" as eurozone countries.

A.Ammann--VB