Russian inflation will soar even higher as sanctions spark another surge in gas prices, British intelligence says

• Russian inflation will likely rise after the nation hiked its gas prices, British Intelligence said.
• Russia raised domestic gas prices 11% at the start of July.

Russian inflation will worsen after a sudden spike in gas prices, according to a new report from the UK intelligence.

Consumer prices in Russia are set to rise even higher after the government implemented prices hikes on gas for its citizens this month, the British Ministry of Defence said in a note this week. Domestic gas prices in Russia spiked 11% at the start of July, likely to make up for industry losses stemming from Western sanctions, the note said.

"This hike is almost certainly intended to increase revenue from Russia's domestic market, in response to the loss of natural gas exports in Europe," the Ministry said.

Gas prices, which are state-controlled in Russia, have already shot up 34% since Moscow began its invasion of Ukraine in 2022. Prices are on track to rise another 8.2% in 2025, which will "almost certainly add to inflationary pressures," the report said.

The increases come as Russia has lost a huge segment of its natural gas business as the European Union has weaned itself off of Russian fossil fuels since 2022. Russia has also cut off natural gas supplies to key European countries, like Germany and the Netherlands, due to suppliers refusing to pay for gas in rubles.

The restrictions have taken a huge bite out of Russia's gas sales, which make up one of the Kremlin's largest sources of revenue. Gazprom, Russia's state-run gas producer, said it lost 629 billion rubles, or around $6.8 billion in 2023 — its first recorded loss in over 20 years.

Sanctions have also hit Russia's oil revenue, another key source of income for the Kremlin. Moscow's total oil and gas sales plummeted 24% in 2023, a sign higher energy prices haven't completely made up for the loss in market share.

Higher prices have posed a burden on Russians, who have been grappling with elevated inflation since the start of the war in Ukraine. Consumer prices rose 8.6% year-per-year in June, Russia's economic ministry reported, well above the Bank of Russia's 4% price target.

British intelligence added that inflation in Russia is "highly likely" to remain above target through the rest of 2024.

Analysts expect inflation to clock in at over 6% by the end of the year, which could cause central bank to lift interest rates to 18% in July, according to Reuters.