The Kremlin's Plans Derailed: Russia Hit By An Inflation Shock

The impact of Ukraine's strikes turned out to be far greater than Nabiullina had anticipated.

The impact of destruction of Russia’s infrastructure and production facilities as a result of airstrikes by the Ukrainian Armed Forces turned out to be much more profound and long-lasting than the Central Bank of Russia had previously anticipated. This forced it to freeze the interest rate.

While Russian officials were trying to reassure the market about the stability of the new three-year budget, the head of the Central Bank of the Russian Federation Elvira Nabiullina effectively acknowledged that Ukrainian drone attacks had achieved what Western sanctions had failed to do for years—undermining the Kremlin’s monetary policy. Instead of the promised easing, the head of the regulator stated that inflationary pressure would persist at least until 2027 and that the key rate cut would have to be halted at 14%, reports Forbes Russia.

“In September, we noted that the scope for rate cuts depends on the parameters of the three-year budget and the effects of temporary capacity losses on inflation and inflation expectations. “As for the second factor [capacity outages], we see that the effects may prove to be more long-lasting,” Nabiullina explained during a press conference.

Decoding Nabiullina

At present, there are still a number of oil refineries and other critical facilities in Russia that have not yet resumed operations following drone attacks. This factor is putting significant pressure on prices and requires heightened attention from the regulator.

From the regulator’s perspective, the impact of the drone strikes on inflation constitutes a “primary effect.” However, the “secondary effects” have proven to be more significant: price increases across a broad range of goods, rising inflation expectations among the public, fuel shortages, and disruptions to digital services due to damage to data centers.

While the regulator has already assessed the scale of the primary effects, the pace of companies’ recovery and the extent of the secondary effects still raise serious questions.

“We estimate that the recovery of production capacity will be gradual, which means that the impact of this factor on prices may be more prolonged and last longer,” — emphasized Elvira Nabiullina, head of the Central Bank of the Russian Federation, acknowledging that the return of production capacity to full operation will extend at least until 2027, though it is still impossible to say exactly when this will happen, according to TASS.

At the end of the third quarter, headline inflation in Russia accelerated to 8%, while core inflation rose to 6.2%. The regulator’s conservative forecast for the end of the year has already been revised upward—to 7.1–7.6%.

The negative impact of prolonged production capacity outages in a number of sectors—which triggered a new wave of inflation starting this summer—has outweighed the positive effects of the approved draft budget, notes Dmitry Polevoy, Investment Director at Astra UA Asset Management Dmitry Polevoy.

The sanctions trap and the logistical impasse

The main problem is that an economy under sanctions has lost its ability to recover quickly. Purchasing new servers for damaged data centers or high-tech oil refining equipment under restrictive conditions is a challenge that takes far longer than just a few months to resolve. It requires a lengthy search for alternative supply routes, the resolution of logistical problems, and additional costs.

Threats to Grain Exports and IT Infrastructure

In addition to the fuel sector, significant challenges are emerging in the fields of agricultural logistics and digital technologies. The destruction of data centers has exposed the vulnerability of Russia’s IT infrastructure, the restoration of which will require a significant increase in critical imports amid sanctions.

At the same time, the deteriorating security situation in the Azov-Black Sea basin poses a direct threat to agricultural exports. The paralysis of grain logistics in this region is prompting analysts to consider the risks and prospects for the 2027 harvest, notes Valery Vaisberg , director of the analytical department at Region Investment Company .

Sergey Klisenko, managing director of the rating service at the National Rating Agency (NRA) Sergey Klisenko forecasts that, given the delays in refinery repairs and the next round of tariff indexation, elevated inflation in the Russian Federation will persist at least until the end of the first quarter of 2027.

Forecasts regarding the interest rate

Against the backdrop of high public inflation expectations (13.2%), the Central Bank of the Russian Federation raised its forecast for the average interest rate in 2027 to 12.5–13.5%. Most economists have revised their timelines for a potential easing of monetary policy.

Conditions for any rate cut will not materialize until at least the first quarter of 2027, according to Denis Popov, a senior analyst at the PSB Analytics Center. Alfa Bank’s chief economist Natalia Orlova forecasts the first cautious steps only in April 2027 (down to 12% by year-end), and even then only if there are no new infrastructure shocks.

As long as the destruction of industrial capacity continues, the regulator should not count on a rapid easing of monetary conditions, the NRA’s analytical service concluded.

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