The Central Bank again cut its key interest rate by a symbolic quarter of a percentage point, to 14%, but warned that high rates will continue longer than planned. This creates problems not only for investors suffering from the stock market’s decline, but also for the Finance Ministry, which is frantically looking for money to cover the budget deficit and service expensive government debt.

It was not hard to guess that this would happen. It is already obvious that Central Bank Governor Elvira Nabiullina’s superiors — probably President Vladimir Putin himself — ordered her to lower the rate. It was not difficult to work out that, with inflation rising again because of the fuel shortage, the Central Bank would, as it did last time, lower the rate symbolically and furrow its brows so that no one got too excited.

And that is exactly what happened.

In its press release, the Central Bank wrote that “pro-inflationary risks prevail” over the forecast horizon. It also expressed concern about uncertainty over the budget parameters. That’s a diplomatic way of referring to the uncontrolled growth in war spending. At the press conference after the meeting, Nabiullina was even more diplomatic: she called the rise in inflation temporary. But she warned that the budget deficit will be higher than planned: up to 8 trillion rubles ($99.9 billion) instead of 3.8 trillion ($47.7 billion). Though that equates to 3.6% of GDP, a budget deficit is considered manageable up to 4-5%.

Sberbank CEO Renews Call for Interest Rate Cut

But that is where the good news ends.

First, calculating the deficit — or anything else — from the size of projected GDP is a rather dubious exercise considering the conditions Russia is operating under. If budget parameters, as Nabiullina lamented, change more often and more sharply than before 2020, then the same can be said for GDP. Both depend on many factors Russia does not have complete control over.

First and foremost, there are oil prices. U.S. President Donald Trump helped Russia’s oil and gas revenues in the second quarter by staging his own “special military operation” against Iran, disrupting shipping through the Strait of Hormuz, while countries began buying large amounts of oil and LNG at exorbitant prices.

Second, the Ukrainian Armed Forces have launched a campaign against Russian refineries and logistics and are methodically turning Crimea into an island, making its supply ever more expensive and complicated.

The conflict with Iran........

© The Moscow Times