Analysts at Renaissance Capital revised their inflation forecast by 1 to 2 percentage points for Russia, not anticipating inflation of 5.4% at end-2025, with a moderately ‘hard landing’ of the overheated economy in 2025 (GDP growth of 1.5%), and the key interest rate increased to as much as 21% by the end of 2024.

As followed by bne IntelliNews, this is due to the pro-inflationary nature of the most recently proposed 2025-2027 federal budget draft.

“The scale of the fiscal stimulus in 2024, according to the new draft budget, remains extremely high. The draft envisages a return to setting expenditure under the ‘budget rule’ from 2025. Nevertheless, risks to inflation from the budget in 2025 remain, including through the 2022-2024 fiscal stimulus plume, the use of rising tax revenues to support current consumption and possible increases in spending plans during the year,” Renaissance Capital analysts warn.

One of the strongest pre inflationary factors is a 12% rise in housing and utility tariffs, double the originally planned, which could add 0.5 percentage points to inflation in 2025. 

“More worrying, in our view, is the probable continuation of the practice of indexing tariffs by an amount significantly higher than the inflation target in the future,” RenCap wrote.

The analysts continue to maintain our position that the Central Bank of Russia will move to lower the key rate in 2025, but as the economy continues to transform, the end of the rate hike cycle is harder to predict.

“The main internal risks to the outlook are related to the speed at which the fiscal stimulus is fading, while external risks are related to the dynamics of oil prices, where the picture changes for the markedly worse at oil prices of $50/barrel and below,” the analysts note.

Finally, RenCap sees a significant risk of changes in the exchange rate under the influence of non-market factors.