The Bank of Russia has trimmed its key interest rate to 14.25% from 14.5%, a more conservative cut than analysts anticipated, as the Kremlin grapples with Western sanctions, soaring military expenditures, and a worsening domestic fuel crisis.

Central Bank Chief Elvira Nabiullina signaled that monetary policy would likely remain tight. She attributed the caution to “pro-inflationary risks” stemming from a highly expansionary fiscal policy, with government spending over the next three years projected to exceed previous estimates.

A primary driver behind the modest rate cut is the recent spike in petrol prices. Nabiullina noted that fuel costs highly impact the inflation expectations of both citizens and businesses. The price surge is linked to Ukraine’s intensifying drone campaign targeting Russian oil refineries, ports, and tankers.

By May, Russian oil production hit a one-year low, causing fuel shortages across 53 regions and forcing some petrol stations to ration fuel. Following a massive drone strike on a Moscow refinery, local media reported that petrol prices jumped by over 3 rubles per liter. To maintain supply, independent stations have been forced to import expensive Belarusian petrol.

Meanwhile, Russian business associations had urged a deeper cut to 13.5% to prevent the economy from “freezing.” High borrowing costs and severe labor shortages caused the civilian economy to contract in the first quarter, forcing staff layoffs and business closures.

However, the central bank remains constrained by massive military spending. Bloomberg reports that Russia’s budget deficit for the first five months of 2026 has already reached 6 trillion rubles (€61–62 billion), exceeding the annual target by 60%, and that plans call for injecting an additional 4 to 5 trillion rubles into the war effort.

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Source: https://finance.yahoo.com/economy/policy/articles/fuel-crisis-war-costs-bank-173619591.html