Fuel Crisis and Market Slump Pressure Rate Decision

The Russian stock market has fallen to levels not seen since late 2022, and businesses are reporting rising costs and plans to raise prices amid the fuel crisis. Under these conditions, the Central Bank will have to make another rate decision. The forecasts are discouraging. Details — in the Fontanka article.

A week before the key rate decision, the Bank of Russia stops publishing materials on monetary policy. On July 24, the board of directors will convene to take the next step and update the medium-term forecast. It reflects expectations for the economic situation in 2026–2029. And nothing positive is to be expected from it. The results of a survey of analysts, conducted before each meeting, served as a spoiler. Forecasts worsened on key indicators.

Almost all key macroeconomic indicators have been revised unfavorably. Higher inflation, higher interest rates, and weaker economic growth mean that the room for further monetary policy easing is shrinking.

In one of the main analytical materials — the «Enterprise Monitoring» — the Central Bank recorded a sharp decline in the business climate indicator, to -3.6 points after 0.9 in June. Investment banker Yevgeny Kogan in his blog called the data «quite deplorable.» «Just so you understand: in the entire history of observations since 2002, only five months have been recorded when the indicator worsened faster. Moreover, the indicator became negative. The graph clearly shows that historically this corresponds to crises,» he commented.

At the same time, the economist noted that these are bad data for only one month and much will depend on how quickly the fuel crisis is resolved, but short-term inflation expectations among enterprises have already jumped, indicating an explosive growth in costs. «As a result, the fuel crisis can both accelerate price growth and send the economy into recession. This situation is called stagflation,» Kogan states.

The Central Bank faces a difficult choice: if it raises the rate to fight inflation, it could finish off the economy, and if it cuts it to support business activity, price growth could accelerate even further and «become uncontrollable.» The regulator has already made it clear that it certainly does not intend to allow the second option.

Business questions the thesis that price growth will necessarily accelerate when the rate is cut, but it does not take into account the situation on the labor market. Record-low unemployment indicates that there are no free labor resources in the country that could be used to increase the output of goods and services. The regulator«s logic is as follows: if we cut the rate, you will take cheap loans, buy more equipment, but who will work on it if the economy is already at full employment? Thus, prices will rise because costs will increase (for example, expenses for the same equipment and salary increases for employees who will have to be retained or poached), while supply will not expand.

This virtual discussion can be traced through public statements. According to the head of the Russian Union of Industrialists and Entrepreneurs, Alexander Shokhin, business expects the Central Bank not to react to rising fuel prices by raising the key rate. Central Bank Deputy Chairman Alexei Zabotkin explained that the regulator cannot ignore the rise in fuel prices and its impact on other economic indicators. Russian President Vladimir Putin, at a meeting with the head of Yakutia, said that the rate should decline and that this would be a natural process. But for now, the words of the head of state are the only significant factor speaking in favor of continuing the rate cuts.

And then there«s the Russian stock market, whose capitalization is supposed to double by 2030 and reach 66% of GDP, but it has withered completely. The main indicator of its condition — the Moscow Exchange index — fell below 2000 points for the first time since October 2022. Shares of the largest companies, Gazprom, Sberbank, and T-Technologies, are trading at historic lows. In 2022, unprecedented sanctions contributed to this; in 2026, everything happened naturally. According to Kogan, investors do not see reasons to buy securities, but there are many reasons to sell them. The economist called this a »crisis of dashed hopes« — including hopes for a peaceful resolution of the conflict in Ukraine.

«The current crisis in the Russian stock market is primarily a crisis of despair and destroyed hopes. So even temporary rebounds could be driven by some additional, albeit temporary, factors that bring at least a little positivity. You»ll say: that«s not enough to reverse the trend. Most likely, that»s true. But for a rebound... perhaps today even that will be enough,« the economist reflects.

Positive news, for example, could be a statement from the Central Bank that no additional rate hike is planned, or the end of the fuel crisis. The first seems slightly more likely, since, as experts explained to Fontanka, resolving the gasoline situation will depend on how quickly damaged refineries are brought back online. Motorists waiting in lines at gas stations may experience some relief by the end of July and beginning of August, but a more pronounced effect is expected closer to autumn, when demand for fuel from agricultural producers subsides.

One can only hope for the calming effect of the Central Bank«s statement. After all, an additional key rate hike may indeed not be needed, although inflation data looks bleak.

«The regulator»s position could be significantly influenced by the acceleration of inflationary processes: according to Rosstat, in June, against the backdrop of the fuel crisis, annual inflation reached 6.02%, and monthly inflation 0.87%, which became peak values for consumer price growth since the beginning of the year. Additional pressure on the Central Bank«s decision could come from the trend in weekly inflation in July: its steady growth averaging 0.2% weekly looks like an alarming signal,» says Natalya Milchakova, leading analyst at Freedom Global.

«At the moment, in our opinion, the most likely scenario is keeping the rate at its current level,» believes Natalya Pyryeva, head of the analytical department at Tsifra Broker.

In addition to gasoline, the budget remains a high risk. The deficit is about 6 trillion rubles (approximately $66.7 billion at current rates) and exceeds the planned figure for the end of 2026 by more than 1.5 times, the expert notes. Yes, in the second quarter, the situation was positively affected by rising oil prices, but the effect is short-lived, and pressure from the budget will persist, Pyryeva believes.

«We expect the key rate to be kept unchanged in July. The pause will last until the picture on the fuel market becomes clearer. By the September meeting, the Central Bank will have a better understanding of the primary and secondary effects of rising fuel prices and their outlook,» says Ilya Fedorov, chief economist at BCS World of Investments.

According to the expert, «the trajectory of fuel prices will be L-shaped.» Fuel production costs have risen, its price will peak and remain at that level, and if it does drop, it will not be by much.

It follows that the period of high interest rates in the economy will last longer than previously thought. When gasoline and diesel prices stabilize, the Central Bank may return to rate cuts in the fourth quarter (October–December) of 2026.

As for a rate hike, analysts do not include it in their forecasts. But it could be an emergency measure if fuel supply volumes do not begin to recover, Fedorov believes. Pyryeva believes that the toughest measure will still be a longer hold of the rate at its current level.

If we consider the probability of the regulator making one decision or another, leading analyst at Freedom Global Natalya Milchakova assigns 75% to keeping the rate at 14.25% on July 24, 20% to cutting it to 14%, and 5% to raising it. As is known, the Central Bank knows how to surprise the market. The last two options, according to the expert, would be unexpected.

If the Russian economy goes through the period of the fuel crisis relatively calmly and inflation does not spiral out of control, then closer to the end of the year the probability of a key rate hike will decrease to zero, the expert believes.