Growth, Key Interest Rate, Ruble Exchange Rate: Forecasts in Light of the War with Iran

With its latest decision on the key interest rate, the Russian Central Bank has once again eased its tight monetary policy. Last Friday, the central bank cut the key interest rate by 0.5 percentage points to 15%. It was the second cut this year and the seventh since June 2025. At that time, the central bank began lowering the key interest rate from a long-standing high of 21%. The high interest rates were intended to curb inflation, which had been driven up by sharply rising defense spending. Now, lower interest rates are intended to stabilize Russia’s economic growth, which fell from 4.9% to 1% in 2025.

Impact of the War on Iran

Commenting on the global economic consequences of the Israeli-American military operation against Iran, which has been ongoing since late February, long-time Central Bank Governor Elvira Nabiullina said: “The situation in the Middle East is having a significant impact on global commodity markets. The ultimate impact on the Russian economy depends on the duration and scale of these geopolitical events.”

On the one hand, higher oil prices could support Russia’s export revenues and the ruble in the short term, according to the central bank chief. However, she also warned: “When we talk about longer-term effects, however, the situation in the Middle East could negatively impact growth prospects for global demand and investment, which could lead to higher inflation in energy-importing countries and disruptions to supply chains. Essentially, this is another supply shock that will affect global costs and, to some extent, also impact prices on the Russian market. Furthermore, logistical problems could also affect our export volumes.”

Central Bank Expects “Balanced Growth”

Nabiullina explained the latest key interest rate cut last Friday as a move toward a balanced growth path. Nabiullina apparently considers “balanced growth” to have been achieved if the Russian economy grows by 0.5% to 1.5% this year, as expected in the central bank’s “medium-term forecast.” Although Russia’s gross domestic product is unlikely to reach the annual growth rate of 1.6% previously expected by the Central Bank in the first quarter of 2026, she maintained during the press conference that the Russian economy could grow by around 1% again in 2026.

The business newspaper Kommersant commented on the Central Bank’s decision as follows: “The Central Bank describes the current situation as a transition from the overheated growth of 2023–2024 to a more sustainable development path—with declining demand, reduced inflationary pressure, and a more balanced economic structure. According to this logic, the Central Bank interprets the current economic slowdown as a necessary phase in the transition to a new equilibrium.”

Citing reasons for the weak production performance at the start of 2026, the Central Bank governor again pointed, among other things, to the “base effect”: The economy had grown strongly in the comparable month of January 2025. Additionally, there were two fewer working days in January of the current year than in the previous year, Nabiullina said. The exceptionally cold weather this year also slowed production in the construction sector.

In its recently updated quarterly forecast on economic development in Russia, the Institute for Economic Forecasting of the Russian Academy of Sciences (IEF-RAS) also expects gross domestic product to rise by about 1% for the full year 2026. However, it assumes that real gross domestic product is likely to remain virtually stagnant in the first half of the year.

High inflation expectations

According to the Central Bank’s medium-term forecast, the annual inflation rate will fall to 4.5% to 5.5% by December 2026 if current monetary policy is maintained. In February, the annual inflation rate stood at 5.9%. Starting in 2027, annual inflation is expected to fall within the target range of 4.0%. Meanwhile, inflation expectations among households and businesses in Russia are alarmingly high. Inflation as perceived by the public reached 15.6% in March, the highest level since August 2025. From November 2025 to February 2026, the figure had stood at 14.5%.

Current data from the Central Bank point to a cooling of domestic demand, particularly consumer spending. The central bank explains that this was partly due to many consumers bringing forward expensive purchases to 2025 in anticipation of increases in the value-added tax and the vehicle recycling fee. Additionally, surveys conducted at the beginning of the year showed that small businesses reported significantly lower demand expectations. Surveys also showed that the shortage of skilled workers is gradually easing as companies plan fewer hires. Unemployment, however, remains at a record low.

“Moderate” increase in capital investment

According to the central bank’s estimates, the economy’s production capacity continued to expand last year. While investment in fixed assets declined slightly at the end of 2025, it remained close to the record levels of recent years. In 2025, it was nearly a quarter higher in real terms than in 2021, the central bank explains. Investment activity remained high, particularly in the manufacturing and service sectors. According to the central bank, this is attributable, among other things, to government support measures and investments aimed at substituting imports. According to the central bank president, investment plans for 2026 are more moderate. Business surveys showed that more companies plan to expand their production capacity in 2026 than to reduce it.

Future Key Interest Rate Trends

External factors prevented the Russian Central Bank from cutting the key interest rate more sharply, explains Natalya Orlova, chief analyst at Russia’s largest private bank, Alfa-Bank. The oil price, transportation costs, and a potential rise in consumer prices are effects of the Iran conflict that are fueling inflation, according to Natalya Orlova. The analyst forecasts that monetary policymakers will cut the key interest rate by half a percentage point in April and could become even more cautious over the course of the year, for example with rate cuts of 0.25 percentage points. By the end of the year, Orlova expects the key interest rate to stand at 13%.

According to observers, the readjustment of the fiscal rule will influence future interest rate decisions just as much as ongoing geopolitical tensions. Andrei Melashchenko, chief economist at the Moscow-based investment firm Renaissance Capital, believes the central bank’s response to the adjusted budget policy is still difficult to predict at this time. He expects a 0.5 percentage point cut in April and a key interest rate of 12–13% by the end of the year.

According to Natalya Vashchelyuk, chief analyst at Russian asset manager Pervaya, high inflation expectations among businesses and the general public are standing in the way of larger interest rate cuts. Vashchelyuk expects the key interest rate to remain at 12% through the end of 2026.

Is the ruble in free fall?

Last Thursday, the Russian currency fell to 87 rubles to the dollar and 100 rubles to the euro for the first time since spring 2025. Previously, the dollar exchange rate had been well below the 80-ruble mark for several months. Analysts attribute the sharp devaluation to the suspension of foreign exchange trading under Russia’s fiscal rule. This has led to increased demand for foreign currency, which is putting pressure on the ruble exchange rate, explains Bogdan Svaritsch, Head of Banking and Financial Market Analysis at Promsvyazbank PSB.

However, experts see no signs of a drastic devaluation of the ruble in the coming months. The Russian investment firm Finam expects a moderate period of weakness for the Russian currency in the spring: 80–84 rubles to the dollar, 91–95 rubles to the euro. In a Central Bank survey from early March, analysts project an average exchange rate of 84 rubles to the dollar for 2026. According to forecasts, the Russian currency will not depreciate significantly until the following years: 92.3 rubles to the dollar in 2027 and 97.8 rubles to the dollar in 2028. The Russian Ministry of Economic Development expects a weaker exchange rate for the Russian currency: from an average of 92.2 rubles to the dollar this year, to 95.8 rubles in 2027, and up to 100.1 rubles in 2028.

According to Promsvyazbank PSB’s assessment, the Russian currency will depreciate to 87.5 rubles to the dollar by the end of the year. According to Finam analyst Alexander Potanin, a trend reversal could begin as early as this May: by then at the latest, the unexpectedly profitable oil business will be injecting more foreign currency into the Russian market. The military operation against Iran is driving up global oil and gas prices. On March 9, the price of Brent, the global benchmark crude, briefly soared to over $120 per barrel. As of Monday, the North Sea crude was trading at $108.06. The Russian Urals crude is also currently making a comeback. On March 20, Urals was trading at $104.84 per barrel—in February, the average price was well below that at $44.59 per barrel.

Foreign exchange shortage puts pressure on the ruble

According to observers, the ruble’s weakness began on March 5, when the Russian Ministry of Finance paused its foreign exchange sales and stopped selling foreign currency. Within a single day, foreign exchange sales dropped from nearly 12 billion rubles to 4.6 billion rubles per day, from 123.3 million euros to 47.2 million euros. At the same time, Russia’s oil exporters have also scaled back their sales of foreign currency, as the industry has been hit since the start of the year by a combination of low oil prices and steep discounts on Russia’s main oil grade, Urals. According to the Russian Central Bank, the volume of foreign currency sold by exporters in February was 31% lower than in January.

Russia’s fiscal rule stipulates that oil and gas revenues above a set price do not flow into the current budget. If the oil price exceeds this threshold, the additional revenue is allocated to the National Welfare Fund. Technically, this is done through the purchase of foreign currency or gold. If the price falls below the reference value, the Russian Ministry of Finance sells foreign currency and gold, as it has done over the past eight months. In early March, the Ministry of Finance suspended its foreign exchange sales for the time being and announced, due to declining oil revenues, a change to the oil reference price, which currently stands at $60. A figure of $45–55 is currently under discussion. The Ministry justified this step by citing the need to preserve the Welfare Fund.

This article first appeared in the exclusive newsletter of the German-Russian Chamber of Foreign Trade