Russian economic forecasts improve despite lingering conflict in Ukraine

Russia's economy will contract less than expected this year and inflation will be lower than previously thought, a Reuters poll showed on Tuesday, after what Moscow calls a "special military" operation in Ukraine entered its fourth month.

Russia's export-dependent economy is set to plunge into recession after Moscow sent tens of thousands of troops into Ukraine on Feb. 24 in a move that triggered sweeping Western sanctions against Russia, including a partial freeze of its reserves.

The average forecast among 18 analysts polled in late May suggested the Russian economy was on track to shrink by 7.6% this year. A similar poll in late April predicted economic contraction of 8.4%.

Forecasts are gradually improving as officials also revise their outlooks. The economy will contract by no more than 5% in 2022, a presidential adviser said earlier in May, weeks after the economy ministry said gross domestic product was on track to contract by more than 12%, in what would be the biggest GDP drop since the aftermath of the fall of the Soviet Union.

The shallower contraction could be a result of less hawkish monetary policy as inflation is running below levels that officials and economists feared it would accelerate to during the first days of Russia's operation in Ukraine.

Now full-year inflation is expected to accelerate to 16.4%, up from 8.4% in 2021, but well below last month's expectations for a 20.5% annual consumer prices increase.

This could give the central bank room to cut the key interest rate to 8.0% by year-end compared with 10.5% predicted in the previous poll. The central bank targets inflation at 4%.

The central bank last slashed it key rate by 300 basis points to 11% (RUCBIR=ECI) at an off-schedule meeting in May ahead of the June 10 planned rate-setting meeting.

The inflation slowdown is driven by sluggish consumer demand at home along with a rapid rouble appreciation. That in turn is driven by capital controls and Russia's record current account surplus, due to high prices for its commodity exports and a rapid fall in imports.

But market expectations change quickly in the current volatile and unpredictable environment, which is driven to a large extent by geopolitical factors, and the rouble may weaken sharply later this year.

The rouble is expected to trade at 77.80 against the dollar in a year from now , compared with a rate of 83.50 predicted by analysts in late April. Tuesday's official rate was at 63.10 roubles per dollar.