Russia's Year of Black Swans to End With Another Inflation Shock

  • Annual inflation decelerated to 10-month low in November
  • Trade measures against Turkey complicate outlook for prices

Russia may be about to take another detour on the way to its next interest-rate cut.

Just as the path to further easing was clearing amid a pause that started in September, sentiment turned within days after a Russian warplane was shot down by Turkey last week. While price growth eased last month to the slowest since January, trade measures against Turkey, in addition to a new federal highway toll, are threatening to set off a new inflation spiral. The annual rate slipped for a third month to 15 percent from 15.6 percent in October.

The central bank’s chase after its medium-term inflation target of 4 percent has been littered with surprises as Governor Elvira Nabiullina lurched from one crisis to another after Russia annexed Crimea from Ukraine in March 2014. The latest twist in Turkey may mean policy makers will end the year half a percentage point short of unwinding last December’s emergency rate increase, with Barclays Plc seeing a cut thwarted this month by the effect of the trade restrictions on prices.

“There are so many various risks all of a sudden that they will prefer to be cautious and take a little bit more time to see,” Liza Ermolenko, a London-based analyst at Capital Economics Ltd., said by phone. “The central bank will probably hold rates for another month this time and will probably start cutting from next year.”

Multiple Shocks

The multiplying risks are compounding what’s already been a year and a half of adjustments to spillovers from geopolitics, swings in commodities prices and the currency market.

Blindsided by the standoff over Ukraine, Nabiullina began a tightening cycle when inflation was stable below 7 percent. Even as the economy ground to a near standstill and headed into its first recession in six years, the central bank jacked up borrowing costs by the most in 16 years in December to 17 percent to arrest the ruble’s collapse.

Food, Ruble

With oil prices slumping and a supply shock from restrictions on some food imports in 2014, inflation didn’t peak until reaching a 13-year high of 16.9 percent in March. After five rate cuts brought the benchmark to 11 percent in July, the ruble’s drop of about 9 percent since then handcuffed the central bank’s ability to offer relief to the economy.

The policy dilemma is similar to challenges in developing nations like Brazil, where inflation above 10 percent is complicating efforts to battle the deepest recession in 25 years. In Russia, Nabiullina last month left open the possibility of holding borrowing costs on pause until a meeting in March. The Bank of Russia will keep its benchmark unchanged when it next convenes to review rates Dec. 11, according to 11 of 21 economists surveyed by Bloomberg.

Forward-rate agreements are signaling 62 basis points of cuts in borrowing costs during the next three months. The ruble weakened for an eighth day against the dollar on Friday, dropping 0.2 percent as of 4:42 p.m. in Moscow.

As tensions flared over the downed warplane, President Vladimir Putin banned Turkish goods from chicken to cucumbers starting Jan. 1. The food restrictions came on top of travel limits that followed the strike on the bomber near the Syrian border on Nov. 24, which the Russian president called a “treacherous stab in the back.” Russia can’t rule out some supply disruptions as a result of its trade measures, according to Economy Minister Alexei Ulyukayev.

The restrictions on Turkish goods echo similar measures on some food imports in retaliation for sanctions over Ukraine. Those added about four percentage points to inflation since they were imposed in August 2014, according to Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. The ruble’s devaluation contributed about 5.8 percentage points this year, he estimates.

Assessments of the ban’s impact on prices vary from as much as a percentage point by Danske Bank to 20-30 basis points in the view of Bank of America Corp. and VTB Capital. The central bank said Wednesday the steps will add about 20 to 40 basis points to inflation from late 2015 to the start of next year, calling their possible effect on medium-term forecasts “insignificant.”

Restrictions on travel are another concern. If that spending is redirected domestically, headline inflation may swell by as much as 80 basis points, Alfa Bank estimates. Levying a fee on heavy trucks for using federal highways may add as much as 1.5 percentage points over 12 months, according to Gazprombank JSC.

Easing Room

While inflation pressures are mounting, the lower base effect from last year is still set to bring down the annual rate. The central bank forecasts price growth will fall below 7 percent next October and reach its 4 percent target in 2017, according to a statement issued after its last rate meeting Oct. 30.

The benign outlook will give policy makers “‘plenty of room” to cut borrowing costs, according to Vladimir Osakovskiy, an economist at Bank of America in Moscow.

“However, the central bank could still be more cautious at the December policy
meeting to take into account new inflationary risks and concerns,” Osakovskiy said in a report Tuesday. “This is likely to increase the risk of another hold during the meeting, if such concerns prevail.”

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