Madi Kapparov: Weekly Economic Update on Russia

Weekly Economic Update on Russia

Madi Kapparov, 22 July 2025

This is a new newsletter by Eurofile. Every Monday evening, we publish a weekly review of major economic news from Russia with a brief analysis. As most data on Russia’s economy is provided by the Russian state, many of the sources referenced will be either Russian state-controlled media or Kremlin-connected state and non-state organizations. Exercise caution using these sources.

July 25 – Russian Central Bank key rate decision

On July 25 at 10:30 GMT, the Bank of Russia Board of Directors will announce their key rate decision. The consensus expected rate is 18%, a 200 bps cut. On June 6, the Central Bank cut the rate by 1%, from 21% to 20%. Ahead of the rate decision, commercial banks in Russia reduced the average deposit interest rate to 17.9% last week vs. 18.3% at the end of June.

By our estimates the reduction to 18% is unlikely to reignite the cooling Russian economy. The Central Bank is facing multiple pressure points despite their official statements. Nabiullina and her colleagues have many factors to consider ahead of the Friday meeting. First, inflationary pressures remain high – while the official weekly inflation rate dropped to 0.02% last week, the week before it was the highest for the year, driven by the new utility and maintenance rates. Unsurprisingly, the Public Opinion Foundation, the Russian state polling institution, found that the share of citizens who "hear critical statements about the authorities from friends" jumped from 25% to 30%. Moreover, summer months tend to be seasonally deflationary periods due to dropping prices for fruits and vegetables. We should wait for seasonally adjusted data; however, *official* data is unlikely to show annualized inflation below 9.3%.

Second, sudden drops (beyond 1-2%) in the key rate might motivate consumers to withdraw money from bank deposits. Lower interest rates offered by commercial banks and higher inflation expectations might motivate consumers to spend money on consumption or convert into foreign currency or other stable stores of values (precious metals, etc.). This will further propel inflation.

Deposit flight would also exacerbate the worsening financial performance of Russian commercial banks. Just last week, the Central Bank reported that nonperforming loans (90+ days past due) had reached 1.51 trillion rubles as of June 1 or 4.4% of the total loan portfolio held by commercial banks. Total nonperforming loans (90+ and less than 90 days past due but with low probability of payment) had reached 2.1 trillion rubles or 5.7% of the total loan portfolio vs. 4.6% last year. On July 17, Bloomberg reported that top executives at some of Russia’s biggest banks had privately discussed seeking a state-funded bailout if the level of bad loans on their books continues to worsen over the next year. The identities of the three lenders were not disclosed, however, it is likely that one of the banks is MKB (Credit Bank of Moscow), showing signs of growing problems this year.

Third, industry leaders and State Duma deputies found a convenient scapegoat in Nabiullina for their economic failings. Most recently, CEO of Severstal Alexandr Shevelev stated that demand for steel in Russia might recover if the key rate is lowered to 12%. The reduction in the rate in June was most likely a politically motivated move.

RGBI (Russian Government Bond Index) on Monday (July 21) closed at 118.27, the highest level since March 2024, on the expectations of further key rate cuts.

NB: we previously discussed the importance of commercial banks for the Russian federal bond market.

However, the Central Bank also faces an increasingly slowing economy, something that a significant rate cut has been argued to ameliorate. On July 16, the Central Bank published their monthly survey of enterprises covering 11.6K nonfinance companies. According to the report, the business climate indicator dropped to 1.5 points for July vs. 3.0 in June and 4.7 in May averaging 3.1 for the last three months. The indicator was reported at 4.2 in Q2 2025 and 10.4 in Q2 2024. Indices for production and demand have similarly reduced significantly month-to-month and vs. similar periods last year. Moreover, an increasing number of companies plan to conduct layoffs. Since the start of the year the share of companies planning layoffs has doubled from 6.9% to 11.5%.

Denis Lomonosov of the Center for Macroeconomic Analysts and Short-term Forecasting (CMASF), a Kremlin-trusted economics think tank, in an interview with Monokl stated that the effective interest rate on federal loans of 14% and corporate loan interest rate of 15%, which are far below the key rate of 20%, indicate that the key rate would be “radically” reduced over the next year. CMASF also published their monthly analysis of macroeconomic trends for May 2025. According to the report, the Russian economy is now in stagnation. However, industrial output in May increased by seasonally adjusted 2.6% month-to-month. Cargo shipments remain unstable, S&P manufacturing PMI “crashed” to 47.5 in June driven by “manager overreaction to recessionary signals.”

Overall, any further reduction this coming Friday would likely be made under pressure from the Kremlin, as even the official inflation data is far above the 4% inflation target and a 2% reduction in the key rate would do little to reinvigorate the Russian economy. On July 20 Chairman of the State Duma Committee on Financial Markets Anatoly Aksakov predicted that key rate would be reduced to 7% in 2026.

Federal Budget

The EU’s 18^th sanctions package introduced a new flexible oil price cap now set at $47.60 per barrel. Freedom Finance Global, a Russian broker-dealer, estimated the impact of the new cap on the Russian federal budget to be 1.5 trillion rubles annually or 18% from the originally planned oil and gas revenues for the budget according to the Ministry of Finance.

The 18^th sanctions package also expanded the number of sanctioned shadow fleet vessels. Likely in response to protect against data leaks in relation to the shadow fleet, Putin invoked the law “On martial law” expanding authorities of the FSB. The FSB will now be responsible for allowing entry into Russian ports by vessels arriving from foreign destinations. The Russian shadow fleet allows the Kremlin to sell oil without price cap limitations.

NB: Chinese UnionPay cards issued Rosselkhozbank are no longer accepted in the EU after the introduction of the 18^th sanctions package.

On July 18 Deputy Chairman of the State Duma Committee on Economic Policy Nikolai Arefyev proposed nationalizing the assets of Russian oligarchs. He stated: “We have quite a lot of reserves that can be used in difficult times… If we nationalize the sources of income used by the oligarchic elite, this money will be enough to solve economic problems.” Just last week, we discussed mass nationalization in Russia as a way to fund budget deficits. Moreover, Arefyev offered to abolish the self-employed classification, as the federal budget is losing significant payments in personal income taxes. According to Arefyev “These people found some kind of occupation to feed themselves, and they are told: "No, you must pay for the fact that you were deprived of work, and also pay taxes." And they came up with this self-employment.”

On July 18, the State Duma passed a bill allowing tax authorities to collect debt on all types of taxes owed directly from citizens’ bank accounts without court orders. If the bill passes the Federation Council and is signed by the president, tax collectors will be able to extrajudicially deduct funds from citizens, an authority that was already granted to them in relation to companies and sole proprietorships.

According to a recent poll by The All-Russian Center for the Study of Public Opinion (VTsIOM), 40% of Russians see no advantages in using the digital ruble. "The two main focuses of public attention are: the security/insecurity of the new form of national currency and the level of control over its circulation by the state. Two public groups with opposing attitudes have formed: for one, digital assets seem safe, and state control is desirable. For the other, more numerous, on the contrary, digital assets cause mistrust, and digital state control over their financial behavior seems excessive and even dangerous," noted Alexander Gavrilov, an expert at the VTsIOM analytical center.

The recently nationalized Yuzhuralzoloto will be sold to a new owner, according to Finance Minister Siluanov. Yuzhuralzoloto is one of the largest gold miners in Russia.

Metals and Mining

Bloomberg reports that Russian precious metals exports to China almost doubled in the first half of the year, as record gold prices boost revenue. Last week Magadan Oblast, third largest producer of gold in Russia, reported a 12% increase in gold mined for the first six months of 2025 vs. similar period last year.

Severstal and Magnitogorsk Iron and Steel Works (MMK) reported their performance for the first six months of 2025. Severstal increased their output in units but reported lower sales and profits as prices decreased. Cast iron production is up 17% year-over-year (5.6 mln tons), steel – up 2% (5.3 mln tons). MMK production of cast iron fell 8.8% to 4.6 mln tons and steel – down 18.2% to 5.2 mln tons. Overall, the demand for steel in Russia fell 14-15%, the demand for steel by the mechanical engineering and utilities sectors – down 25%, and by the construction (real estate development) sector – down 13%.

More than 50 Russian coal mining companies are either close to bankruptcy or already went bankrupt this year, according to the Ministry of Energy. Losses in the coal mining industry amounted to 112.6 billion rubles last year and this year are expected to reach 300-350 billion rubles. The Ministry of Finance offered an assistance package to coal producers valued at 63 billion rubles. However, the impact of the assistance package is likely to be muted as those are not real cash injections but rather a mix of tax and insurance payment deferrals.

Despite the woes of Russian steelmakers, China boosted steel exports to Russia. For the first five months of 2025, Chinese export of cast iron, steel, and specialized steel products to Russia increased 16% in monetary terms, vs. 1.3% increase for the entire 2024.

Gasoline Prices

Wholesale gasoline prices reached their highest level for the year on SPIMEX on Monday, July 21. 95 RON gasoline rose 0.56% to 74.51K rubles per ton, and 92 RON rose 0.11% to 65.27K rubles per ton. The price increases are reportedly driven by refinery repairs and seasonality in demand. This follows last week’s increase of 3.90% for 95 RON and 1.57% for 92 RON.

Last week, Rosstat reported that retail gasoline prices rose 0.4% for the week of July 8-15. On average, the weekly price increase was 0.1% between January and May. The rising gasoline prices are the main shock driver of inflation according to MMI, Russian economics observers on Telegram. The output of refineries in Russia is no longer published. However, the limited access to Western parts and Ukrainians drone strikes are likely major contributors to the rise. Last year, Ukrainian strikes against Russian refineries dropped production by 20%.

Agriculture

Russian wheat exports reached a 17-year minimum in July. Bad harvests, low global prices, and strong ruble are hitting Russian farmers. It is estimated that July wheat exports were 2.0-2.6 million tons vs. 3.67 million tons in July 2024. Export of wheat to China for the first six months of 2025 contracted 15-fold from $38.9 million to $2.5 million.

The 2025 harvest season yielded only 3.8 million tons of wheat as of July 2 vs. 16.5 ton last year. Three main wheat producing regions of Russia, Rostov Oblast, Krasnodar Krai, and Stavropol Krai, are expected to harvest the lowest amount in five years, according to the Institute for Agricultural Market Studies. The regions are experiencing the worst drought in years.

On July 21, Kommersant reported that Rostov Oblast, the main producer of wheat in Russia, is expected to harvest 30% less than last year. The expected harvest was revised from 9 million tons to 8 million tons compared to 11.4 million tons planned at the beginning of the year. Frosts, droughts, and fires in the region inflicted damage to wheat harvest valued at 7.8 billion rubles.

Other Industries

Russian forestry firms reported 2% to 10% output contraction for the first six months of 2025. Deputy Minister of Industry and Trade Mikhail Yurin stated: “The two main reasons that we see are, of course, the key rate that we have, and the exchange rate that is currently being formed. Our industry has been and remains export oriented. And with the current macroeconomic preconditions that we have, unfortunately, we are in a very difficult situation.”

CEO of Russia’s largest infrastructure construction holding company, Natsproektstroy, Alexey Krapivin expects more bankruptcies in the construction (real estate development) sector in 2025. According to him, the high key rate, the declining order pipeline, and other factors will drive the increase in bankruptcies in infrastructure construction.

Russian car dealerships still have nearly half a million cars in inventory. At the start of the year the unsold stock was estimated at 500K vehicles and likely reduced by 20-30K in the first six months of 2025, according to Avtostat. Discounts and other incentives offered by dealerships fail to incentivize demand. On July 8, RBC reported mass closures of car dealerships. Since the start of the year 200 dealerships have shuttered and 30% of the remaining experience severe financial troubles. The remaining number of dealerships is estimated to be 4,000.

Comic relief

Mikhail Klyukin, one of the long-term minority shareholders of Sovkombank, attempts to sell his 5% share in the bank on Avito, Russia’s Craigslist/eBay. The listing does not specify an asking price. While Sovkombank is listed on the Moscow Stock Exchange, Klyukin is attempting to sell his 7% share in Sovko Capital Partners, which translates to a 5% share in Sovkombank. Investment bankers be damned. But on a more serious note, the unorthodox approach might indicate serious troubles at Sovkombank, something ibankers servicing the deal would detect quickly. Perhaps Sovkombank is another bank negotiating a potential bailout with the Central Bank discussed earlier.

That’s it for the week.