Though the pandemic arrived in Russia later than western European countries, it quickly became the country with the third highest number of cases, and currently sits fourth behind the US, Brazil, and India. Last week, as economic concerns continued to mount, the Russian central bank cut interest rates to a record low of 4.25%. The Bank of Russia has opted for consecutive months of smaller cuts in order to protect the rouble, rather than the single larger cut approach of the Federal Reserve.
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Though inflation is running below the target of 4%, policymakers will be aware of how inflation spiked in the middle of this decade following a massive depreciation of the rouble, caused by western sanctions after an invasion of Ukraine and tumbling oil prices. It was only brought under control by rate hikes to over 16%, accompanied by a year-long recession.
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However, persistently weak macroeconomic data has forced their hand. Russia did not go into lockdown until after the first quarter of 2020, so a Q1 GDP growth of 1.8% is not at all representative of the impact of the pandemic. More timely data makes for a worrying reading. Industrial production was over 9% lower this June compared to last, despite lockdowns restrictions being lifted. There was barely any improvement from May.
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This is partly down to falling oil prices, as a result of weaker demand throughout the world and the Russia-Saudi Arabia oil price war. Already, income from oil exports has been nearly $20bn less than the same period last year. Revenues from the oil and gas industry contribute a significant amount to the Russian federal budget, which faces a shortfall of nearly $40bn dollars this year according to the finance ministry. As a result, President Putin has had to delay the implementation of a $360bn national development plan, whose targets include healthcare for all and attracting more foreign students to Russia by 2024.
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