According to latest reports, the U.S. and the EU are close to agreeing to new sanctions on Russia in response to Russian aggression towards Ukraine in the Sea of Azov in November 2018 (see WERO 28 November 2018). Two and a half months after the incident, 24 Ukrainian sailors are still held in Russian custody despite EU negotiations to release them. Next week the EU will discuss the new sanctions which could be directed at Russian individuals and companies involved in the capture of the three Ukrainian ships. It remains to be seen whether the measures will be largely symbolic with limited economic impact or will go beyond that. Our current growth forecast of +1.5% in 2019 takes into account new sanctions with a moderate impact. Meanwhile, the Central Bank of Russia (CBR) kept its key policy interest rate unchanged at 7.75% last week. Consumer price inflation rose to 5% y/y in January from 4.3% in December, driven by faster growth of food prices (+5.5%), the VAT hike from 18% to 20% at the start of this year, and the ongoing impact of the weakened RUB in H2 2018. We forecast average inflation of 5% and one interest rate hike in 2019.
