Moscow: Russia's ongoing fuel crisis is further exacerbating the already existing challenges that the country's economy is facing amid a period of slowdown in economic growth and high financing costs in the private sector. The rapid rise of gas and diesel prices is passing onto other goods and services via higher production and transport costs, forcing Russia's central bank to adopt a more cautious approach against rate cuts.
According to Anadolu Agency, slowing domestic demand caused by the ongoing war with Ukraine has already been pressuring companies, but climbing fuel prices further worsen the situation, while rising energy and logistics costs lead to expensive access to working capital and investment financing for an extended period. Various restrictions on fuel sales have been imposed in more than 40 regions of Russia, while Moscow halted gas, diesel, and jet fuel exports to increase the domestic market's supply.
Russian Deputy Prime Minister Alexander Novak cited the partial shutdown of some refineries amid Ukrainian drone attacks, increased demand during the summer, and changes in delivery routes as the main drivers of the fuel crisis. Russia, being one of the world's leading oil and petroleum product suppliers, saw the problem extend beyond the domestic market, affecting Europe and Asia.
Russia's statistical bureau, Rosstat, reported that gas prices in the country rose 2.1% and diesel 3.4% during the week of June 30-July 6, with weekly inflation at 0.31% during the same period. Gas prices rose 13.9% and diesel 14.7% between Jan. 1 and July 6, while the overall rise in consumer prices was 4.5%.
The Russian central bank indicated that the impact of the fuel market situation on inflation might last longer than in the past. The rise in fuel prices could escalate the rate of price increases across a broad range of goods and services due to mounting costs and heightened inflation expectations. Elvira Nabiullina, governor of the Russian central bank, mentioned that inflation in June was impacted by fuel price hikes, assuring the public that Moscow is taking measures, but restoring supply will take time.
The central bank reported that fuel, energy, and water expenses constitute an average of 7% of total company costs, with these expenses increasing around 11% year-on-year in 2025. Concurrently, logistics, storage, and delivery costs surged 13.8%. During periods of strong demand and high inflation expectations, companies pass on rising costs to sales prices more quickly, impacting sectors like food and light industry.
The bank noted that the rise in fuel prices has increased costs in numerous sectors, such as agriculture, food, retail, construction, and transportation. Diesel supply issues during the summer peak of agricultural production drive up production and transportation costs, intensifying pressure on food prices. Russia's central bank cut its policy rate by 25 basis points to 14.25% on June 19, with fuel market risks and budget spending narrowing their policy space.
The Russian economy is estimated to have grown 0.5% in the first half of the year, largely attributed to state-sponsored sectors. The continuation of high public demand necessitates a more moderate outlook for private consumption and investment. The Russian private sector faces a slowdown in domestic demand, expensive credit, and rising input costs. Rising fuel prices push up inflation, requiring the central bank to be cautious with rate cuts, delaying the decline in borrowing costs companies expected.
The Russian economy is in a cooling phase, with supply issues adding pressure on investment and production capacity expansion efforts. Export bans introduce an international dimension to the broader issue. The International Energy Agency reported that previous declines in Russian diesel and jet fuel exports widened global price differentials. The halt in Strait of Hormuz shipments intensified efforts to seek alternative suppliers, driving up transport costs.
Novak stated that fuel demand in the first half rose about one-third compared to the same period last year. The necessary decline in production led to shifts in delivery routes, and Moscow maximized capacity utilization at operational refineries. Current fuel stocks are directed to the market, with scheduled maintenance at some facilities postponed, and arrangements made for imported fuel shipments to begin in July.
Russian President Vladimir Putin asserted that the Russian energy system's resilience is among the highest globally, assuring that fuel difficulties will be short-lived. Industry officials suggest that the normalization of fuel demand will depend on factors such as the trajectory of rate cuts, private-sector financing conditions, and the duration of export bans.