The Bank of Russia has lowered its key interest rate to 14.25% from 14.5%, a more cautious move than most analysts and business groups had anticipated. The decision reflects mounting inflationary pressures linked to rising military expenditure in Ukraine, the impact of Western sanctions, and a domestic fuel crisis triggered by Ukrainian drone strikes on Russian oil infrastructure.
At a press conference on Friday, central bank governor Elvira Nabiullina—appearing publicly for the first time since early June, after what she described as an illness—made clear that further monetary easing is unlikely in the near term. She cited "pro-inflationary risks" stemming from a "more expansionary fiscal policy," as the Russian government plans higher-than-expected budget spending over the next three years.
Fuel Prices and the War Economy
One of the key factors behind the modest rate cut was the sharp rise in petrol prices. "Rising petrol prices may also affect inflation expectations, as this is a highly sensitive commodity both for people and for companies," Nabiullina said, directly linking Ukraine's intensified air campaign to specific economic strains inside Russia.
In recent months, Ukraine has stepped up drone strikes on Russian oil refineries, ports, and tankers, disrupting fuel supplies. Some petrol stations have introduced rationing. In May, Russia's oil production fell to its lowest level in a year amid the attacks. At least 53 regions have reported petrol shortages. On the night of 18 June, nearly 200 Ukrainian drones struck Moscow and the Moscow region—the largest such attack on the capital since the full-scale war began. Footage of an explosion at a refinery in south-eastern Moscow, which blew the lid off a storage tank, circulated widely in international media.
The business daily Kommersant reported a sharp rise in petrol prices, noting that in the Moscow region fuel had increased by more than three roubles per litre. Previously, prices for AI-92 and AI-95 grades had been rising by an average of 0.1–1 rouble per litre. The outlet attributed the situation to "reduction in fuel supply," "unscheduled refinery maintenance, increased seasonal demand and panic buying," without mentioning Ukraine's retaliatory strikes. Petrol stations not owned by Russia's nine largest oil companies have been forced to purchase more expensive Belarusian fuel.
Business Fears of a Freeze
Since last year, the central bank has been cutting rates only cautiously as signs of economic slowdown have emerged. In the first quarter, the Russian economy contracted for the first time in three years, as high interest rates and labour shortages hit civilian sectors. Analysts had expected a sharper cut to 14%, according to a consensus forecast from RBC. On the eve of Nabiullina's appearance, Russian business associations called for a one-percentage-point reduction to 13.5%, warning that the economy risked "freezing completely." High rates are squeezing companies: large firms are shedding staff and seeking state support, while some small businesses are closing.
In 2024, the central bank raised rates sharply to multi-year highs amid a surge in inflation driven by military spending. According to Bloomberg, Russia's budget deficit for the first five months of 2026 has already reached 6 trillion roubles (€61–62 billion), or 2.6% of GDP—exceeding the planned annual level by 60%. The government is planning to increase military spending by a further 4–5 trillion roubles (€41–52 billion), unnamed sources told Bloomberg.
At the St Petersburg International Economic Forum earlier this month, which Nabiullina did not attend, President Vladimir Putin rejected claims of an economic collapse, asserting that GDP growth had "only fallen to the level of the eurozone countries."
The broader European context is clear: the war continues to drain Russia's resources, while Ukraine's retaliatory drone campaign is directly disrupting Russian energy markets. For European readers, the episode underscores how the conflict's economic consequences are not confined to Ukraine but are reverberating across the continent, affecting energy prices and supply chains. The EU has already imposed multiple sanctions packages, and the bloc's leaders are debating further measures, as well as potential talks with Russia—a topic that remains deeply divisive among member states.
