Nabiullina Faces A Choice

The fuel crisis in Russia is spiraling out of control.

Last week, problems in Russia’s fuel market only worsened. Russian authorities continued to “pretend that nothing is happening”: Novak, the federal government’s deputy prime minister in charge of energy, once again spun tales that imports and Russians themselves would save the Russian fuel market.

Specifically, according to official estimates, once the frenzy subsides, fuel consumption will drop by a third. However, this forecast failed to take into account that more and more Russian refineries and oil depots continue to go up in flames like candles.

While Novak was feeding “nonsense” to ordinary Russians with his speeches, Putin himself slipped into the role of the great Mao and backed a proposal to increase the role of mini-refineries in fuel production in Russia.

This massive upheaval, which Russians watched unfold on their TV screens, only exacerbated the shortage and led to rising gasoline prices. Incidentally, according to official data, gasoline prices in Russia rose by 6.88% in June and by 2.11% during the first week of July.

As a result, even the official inflation rate accelerated: on an annualized basis, it stood at 6.02%. The situation required the Central Bank of Russia (CBR) to raise interest rates to combat inflation. Putin’s business ombudsman—Shokhin, who is under sanctions—reacted very strongly to this situation, calling on the Central Bank not to raise the rate at its July 24 meeting.

According to all the rules previously announced by the CBR, it should raise the rate. However, its opponents point out that raising the CBR’s rate will not solve the fuel problems, nor will it reduce the number of fires at Russian refineries.

In principle, they are right: to solve Russia’s economic problems, the war must end, rather than constantly adjusting the CBR’s key rate. But the Central Bank appears to be serious; even rumors to that effect sent the Russian stock market tumbling on Friday.

If the Central Bank decides to raise rates on July 24, it will mark the first official acknowledgment by Russian authorities that the fuel crisis has exacerbated economic problems.

I won’t speculate on what the CBR will do on July 24. On the one hand, Elvira Nabiullina has less than a year left until retirement, and seeking confrontation with the Kremlin just to throw herself out the window is not her style at all.

On the other hand, there is the factor of the price of Russian oil, which was still trading at $41–42 per barrel at the beginning of last week. However, following Iran’s attacks on Bahrain and Kuwait, as well as on a gas tanker from Qatar, the situation has changed. For Russia, the price of oil remains the number one factor in all decisions, including those regarding interest rates.

Vitaly Shapran, Facebook

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