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Russia Seen Refraining From Rate Increase on Ukraine

Russia’s central bank will probably refrain from seeking to counter accelerating inflation with higher interests rates as the economy comes under increasing strain in the escalating Ukrainian crisis.

Policy makers will leave the benchmark one-week auction rate at 7 percent at a meeting in Moscow tomorrow, according to 22 of 23 economists in a Bloomberg survey. One forecast an increase to 8 percent. The benchmark won’t be cut until at least a meeting in June, Chairman Elvira Nabiullina said April 2.

The escalating crisis in Ukraine has led investors to punish Russian assets, leaving policy makers to struggle with an economy on the brink of recession with the inflation rate above the central bank’s target for a 19th month. The worst standoff against the U.S. and Europe since the Cold War is exacting a cost in the bond market, with Russia scrapping debt sales yesterday for the seventh time in eight weeks as the ruble fell.

Policy makers are set to “confirm that rates will remain at the current level in the coming months or may be even higher, depending on the situation in Ukraine, which is obviously the main driving factor for the ruble right now,” Piotr Matys, an emerging-markets economist at 4Cast Ltd in London, said yesterday by phone.

Sanctions Threat

The ruble has lost 8.2 percent this year against the dollar, the second-worst performance among 24 emerging-market currencies tracked by Bloomberg after Argentina’s peso. The Russian currency weakened 0.3 percent to 35.7995 as of 5:44 p.m. in Moscow.

The U.S. and its allies have additional sanctions against Russia ready and “will follow through” if there is no progress in Ukraine in the coming days, U.S. President Barack Obama said in Tokyo today after meeting Japanese Prime Minister Shinzo Abe.

Russian President Vladimir Putin said today that sanctions aren’t having a “critical” impact on the country. He warned Ukraine not to continue an offensive against pro-Russian separatists after troops entered the eastern city of Slovyansk, killing five rebels. If Ukraine used its army against civilians, “it will have consequences for the people who make such decisions,” Putin told reporters in St. Petersburg.

Missing Target

Consumer-price growth accelerated to 6.9 percent in March from year earlier after 6.2 percent in February. Inflation may reach 5 percent to 6 percent in 2014, Nabiullina said March 27, compared with the central bank’s 5 percent target this year. It missed its target range of 5 percent to 6 percent in 2013.

Inflation may peak in May or June at 7.5 percent, Maxim Oreshkin, head of the Finance Ministry’s strategic planning department, told reporters April 21. Speaking during an annual televised call-in show last week, Putin said he hoped the central bank could keep inflation at 6 percent to 6.5 percent.

Inflation vaulted past issues in housing and utilities to become the biggest problem for Russians, according to a poll published April 14 by the state-run All-Russia Center for the Study of Public Opinion.

“We expect inflation to slow down in July and it’s unlikely that the central bank will change the rate before that,” said Olga Sterina, an analyst at UralSib Capital in Moscow.

Temporary Increase

Policy makers kept their key rate at 7 percent on March 14 after what the central bank called a temporary increase from 5.5 percent the previous week after Putin secured lawmakers’ approval to send troops into Ukraine.

The three-month MosPrime rate, which large Moscow banks say they charge one another, may rise 30 basis points, or 0.3 percentage point, in the next three months, according to forward-rate agreements tracked by Bloomberg.

Gross domestic product may expand less than 0.5 percent this year or not grow at all, according to Finance Minister Anton Siluanov. GDP grew 1.3 percent in 2013, the slowest pace in four years. Capital outflows surged to $50.6 billion in the first quarter from $27.5 billion a year earlier.

“Capital outflows reduce the possibility for investment growth in the economy and create risks of an unbalanced budget,” Siluanov said April 15.

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