Middle East conflict having limited impact on inflation in Russia for now - Central Bank analysts
MOSCOW. April 16 (Interfax) - The direct impact of the conflict in the Middle East on Russian inflation appears limited for now, analysts from the Central Bank's Research and Forecasting Department said in their latest Talking Trends bulletin.
"Nevertheless, a prolonged conflict could increase logistics costs and prices for imported and exported goods, which is a significant inflationary risk," they said.
The escalation in the Middle East has provoked a surge in prices for many commodities exported by Russia. "An increase in exports, all else being equal, has a disinflationary effect inside the exporting country as its national currency strengthens amid growing sales of export earnings. However, as for the Russian economy, we expect that the change in external conditions might entail both disinflationary and proinflationary effects," the analysts said.
"The magnitude and duration of these effects and their implications for inflation in Russia strongly depend on the persistence of the Persian Gulf conflict and the size of irrecoverable production and logistics losses. High uncertainty makes it hard to quantify the overall effect of proinflationary and disinflationary factors on price dynamics, especially taking into account that they will have different time lags. Almost all proinflationary factors that we identified are of a temporary/one-off nature. Nevertheless, when making monetary policy decisions, it is crucial to timely identify and take into account the expected second-round effects of these factors on consumer prices," they said.
The conflict could also affect food prices. "After the conflict ends and shipping through the Strait of Hormuz resumes, commodity prices could normalize fairly quickly. A key exception is gas. The fighting has taken out approximately one-fifth of No.3 global exporter Qatar's LNG export capacity for up to five years, and gas prices are likely to remain elevated for several years. Natural gas is the primary feedstock for nitrogen fertilizer production, and prices for these have also risen," the analysts said.
The situation is compounded by the fact that this price spike and the drop in supplies from the Middle East occurred during the peak of the Northern Hemisphere's sowing season. "This will drive up costs for agricultural producers, and a shortage of fertilizers could also lead to reduced yields or necessitate a transition to less resource-intensive crops. Ultimately, this means that global food prices-and, to some extent, Russian food prices-could remain elevated at least until the next, 2027/2028 agricultural season," they said.
Iran's ban on fruit and vegetable exports could have a less indirect impact on prices, but this factor is expected to have limited impact on Russian inflation.
The analysts also see risks of accelerated price growth for certain non-food products due to higher insurance costs and disruptions to supply chains with Middle Eastern countries, primarily the UAE. However, this "is expected to have a limited direct impact on the consumer price index, as it will primarily affect brands not included in Rosstat's consumer basket." However, the secondary effect-rising prices for related goods-could be significant.
Furthermore, given travel restrictions in several Middle Eastern countries, demand could shift to both domestic and international destinations, which could support rising prices for tourism services.
