Putin presses the Bank of Russia to make more optimistic economic forecasts

As Vladimir Putin’s invasion of Ukraine continues, he is urging the Bank of Russia (BoR) to be more optimistic about Russia’s economic outlook.

On February 24, Russian troops invaded Ukraine, frightening European energy customers. The market that used to absorb nearly 2.5 million barrels per day of crude oil, 1 million barrels worth of refined products, and 155 billion cubic metres of natural gas per year has almost disappeared.

Soon after Putin’s troops crossed into Russia, crude oil flows from Russia to Europe started to decline. When the European Union banned seaborne imports from Russian crude oil, on Dec. 5, they had already fallen to with only Bulgaria, who secured a temporary exemption. The same trend is being followed by refined products ahead of similar sanctions that came into effect on February 5.

Russia’s European market has been closed for natural gas from Russia. The huge network of gas pipelines and gas fields, which were built at a cost of hundreds upon billions of dollars, since 1968 when the first gas entered Austrian territory, was destroyed.

In 2017, it was estimated that $100 billion had been spent on the development of Russia’s Yamal Peninsula gas reserves. Most of these were connected to Europe via pipelines, including the ones running underneath the Baltic Sea, which connects Russia to Germany. This figure is expected to increase by at least two-thirds by 2025. Many of those investments now seem redundant.

Although Russia might be able to salvage some kind of energy relationship with Europe following the war, which it invariably will, it is unlikely that EU countries ever will allow themselves or need to be as dependent upon Russian gas as they were a year ago.

Sources told Bloomberg that Kremlin officials desire a clearer indication that interest rates could come down later in the year when the central bank holds its first meeting of 2023.

Elvira Nabiullina, Governor, and her fellow colleagues have not yet suggested any immediate easing due to higher inflation risks. Instead, they indicated that rates have little room for fall and are likely to do so.

According to its October outlook, the Bank of Russia predicted that its benchmark would average 6.5pc-8.5pc in this year’s forecast. This means that both increases and decreases are possible.

Economists predict that Friday’s key rate will remain at 7.5pc for a third consecutive week. After reaching a peak of 20pc in response to the invasion of Ukraine, and subsequent sanctions by the West, rates have dropped back.

The request for comment was not immediately answered by the government’s press office.

Because of a communication blackout prior to rate meetings, the central bank didn’t respond.

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