Crop losses in the US, Russia and other parts of the world have led to a sizable increase in grain prices. Global wheat prices have risen by around 45% from mid-June lows. Russian wheat prices in Black Sea ports have risen by 15-20% from the June level. Higher grain prices are expected to push up prices for bread and other food items. Considering a relatively large weight ? 37.3 % – of food and beverages in Russian CPI, this will inevitably lead to higher inflation in Russia in coming months, although Russia’s entry to the WTO and stable global meat prices should dampen the shock somewhat.
The inflation rate estimate for Russia in 2012 has been adjusted upward to 6.5% in line with the average of the consensus inflation rate expected for the economy. Delayed utility price increases have also been responsible for higher inflation in recent months. The one off increase in regulated household utility prices that was delayed from January led to a 2.7% m o-m rise in services costs in July. The inflation rate is expected to exceed the Russian Central Bank (RCB) target in 2012.
In the early months of the year, high oil prices underpinned resumption of the underlying trend of real appreciation of the ruble. According to the Economist Intelligence Unit, the real effective exchange rate appreciates by around 4% in the firstquarter. However, in the second quarter, Russia experienced a weakening of its currency in the market’s reaction to global uncertainty and capital flight from risk as well as a decline in oil prices. According to preliminary data, Russia continued to run a large current account and trade surplus in the first half of 2012. High oil prices are the main reason behind the sustained Russian current account surplus, although exports of other raw materials and basic manufacturing also contributed to its current account surplus.
The Russian economy expanded by 4.9% in the first quarter y-o-y above its long term trend, but a continuation of the economy’s expansion will remain dependent on international commodity prices. Economic growth is decelerating as global growth has slowed. The Russian economy is forecast to grow by 3.7% in 2012 and by 3.4% in 2013. Domestic demand remains the main driver of growth with firm fixed investment expansion and a 7.2% rise in household consumption. Seasonally adjusted retail sales increased by 0.5% m-o-m in June. Consumer and business confidence also have remained relatively high. Weak data on imports of machinery, however, suggest that there would not be a strong recovery in investment spending in the second half of 2012.
Increased oil revenues have caused a surplus in first half of 2012. Fiscal policy for 2013-15 will be based on a new fiscal rule which limits budgetary spending in line with movements in oil prices. The new rule allows planned spending to rise by 5% in 2013. This rule would not decrease the dependence of the government budget on the country’s oil revenue in the short run as it is expected that the non-oil deficit would shrink to only 10% in 2014 from 11.3% in 2011. Monetary policy, on the other hand, has been more prudent as the central bank has left the key refinancing interest rate unchanged at 8% in its latest meeting in July. Rising inflationary expectations have been the main reason for keeping interest rates on hold over the last six months. After higher than-expected inflation in June and the increase in utility tariffs in early July, the central bank is expected to wait for a clear indication of inflation before possible changes to monetary policy. There is an official commitment to move towards a floating exchange rate with RCB intervention confined to preventing excessive currency volatility.