Russia continues to face pressure from rising inflation rates.

The Russian ruble remains steady at 104 per US dollar after a slight appreciation, supported by the Central Bank of Russia maintaining its key interest rate at 21%. This decision comes despite concerns over increasing inflation expectations for consumers and businesses. However, ongoing trade wars and slowing demand from China directly pressure the ruble. While the weaker ruble makes imports more expensive, it benefits Russia's export-driven economy, boosting domestic companies' profitability through favorable exchange rates.

The Central Bank of Russia kept its interest rate at a record-high 21% during its December meeting. The market had anticipated a 200-basis-point hike to 23%. The decision was influenced by reports indicating that credit activity remains subdued, justifying a pause in rate hikes. Nevertheless, the bank highlighted that core inflation would likely continue to rise, revising its inflation forecasts for 2025 and 2026 upwards. Additionally, the central bank noted that the ruble's depreciation, fiscal imbalances, and ongoing labor market challenges are contributing factors to soaring inflation.

Russia's GDP grew by 3.1% year-on-year in Q3 2024, marking the slowest expansion since Q1 2023. This slowdown reflects the impact of Russia's economic crisis, triggered by Western sanctions following its invasion of Ukraine. The deceleration also stems from reduced demand in China, one of Russia’s largest trading partners, due to its economic slowdown and prevailing deflationary conditions. However, the GDP growth rate exceeded the Finance Ministry’s forecast of 2.9%, though it fell slightly short of the Central Bank’s projection of 3.2%.

Russia's inflation rate surged to 8.9% in November, up from a five-month low of 8.5% in October, surpassing market expectations of 8.7%. Prices for most goods, particularly in services, food, vegetables, and fruits, increased sharply. Meanwhile, non-food product prices remained stable at 5.7%, indicating strong domestic demand spurred by government stimulus measures, which injected substantial funds to counter potential economic slowdowns after military mobilization efforts.

The Composite PMI rose to 52.6 in November from 50.9 in the previous month, reflecting the fastest expansion since March. This marked the second consecutive month of growth in private sector activity, driven by both manufacturing and services. New orders rose to their highest level since April, particularly in manufacturing, which is showing signs of recovery. Meanwhile, new businesses in the service sector also grew rapidly, supporting strong employment levels, especially in services. Conversely, manufacturing slightly reduced its workforce to align with workload volumes. However, production costs continued to rise, prompting businesses to pass these costs onto product prices.

Russia's 10-year government bond yields climbed above 16% in December, standing at 370 basis points, relatively stable compared to early 2024. This occurred amidst an oversupply of government bonds and waning demand for Russian assets due to sanctions. The Central Bank of Russia is expected to pursue tighter monetary policy. Investors closely monitor the country’s rising inflation this year as a key benchmark for assessing short-term interest rate trends.