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Why Russian inflation will fall 'abruptly' next year

Russia's troublesome inflation rate will start to drop "abruptly" by the start of next year, the governor of Russia's central bank told CNBC, as the monetary authority's "tough" monetary policy starts to have the right effect.

Inflation in Russia stands at 15.7 percent, a far cry from the central bank's inflation target of 4 percent. The country's central bank kept interest rates at 11 percent in August in a bid to tackle the high rate, a controversial move for a bank to make while an economy is in recession.

Russian Central Bank Governor Elvira Nabiullina told CNBC this weekend that the bank needed to focus on cutting inflation, despite Russia's turbulent economy, which is expected to shrink 3.7 percent this year.

"The International Monetary Fund sees Russia's inflation rate to be higher than our forecasts, and it means that we should be more attentive to the inflation risks, because our task is to reduce inflation to achieve our goal of 4 percent by 2017," Nabiullina said, speaking to CNBC on the sidelines of the International Monetary Fund/World Bank's annual conference in Peru at the weekend.

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Inflation in Russia has been exacerbated by a raft of negative economic and political shocks that have largely put the country in the economic wilderness.

A shopper in Moscow, Russia
Andrey Rudakov | Bloomberg | Getty Images
A shopper in Moscow, Russia

Notwithstanding Russia's annexation of Crimea and role in the pro-Russian uprising in Ukraine last year, which led to international sanctions being placed on it, Russia has also had to deal with a collapse in oil prices, capital outflows and the decline in investor confidence that has accompanied those events.

While a dollar fetched 40 rubles this time last year, the currency has weakened heavily since then to trade around 70 to the dollar. After a brief recovery in the early summer, in August the currency started to depreciate again. Currently, a dollar is worth around 61 rubles.

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Governor Nabiullina did not think the inflation rate would reverse its downwards trajectory, however.

"Some increase in inflation occurred because we witnessed some deprecation in the ruble in August, resulting in some increase in inflation in September. However we don't forecast inflation will continue to grow. On the contrary, it went down to 0.1 percent per week, which we witnessed practically over the whole duration of the summer."

"We're assuming that, by the end of this year, inflation will be a little bit more than 12 percent, 12 to 13 percent, but then it will start dropping quite abruptly because those one-time factors that caused the inflation will have passed and also because of weak demand in the economy and our tough monetary policy."

The tough monetary policy – of keeping interest rates high in order to tackle inflation (high interest rates are aimed at encouraging saving and curbing consumer spending which pushes prices higher) has not been universally popular in Russia. The country's poor economic growth outlook remains the government's primary focus and there have been signs that, despite sticky inflation, the central bank has got the message loud and clear from the Kremlin.

Russian President Vladimir Putin and his colleagues have repeatedly said that high interest rates have thwarted lending activity that could help Russia recover faster. Criticism of the central bank's policy from the top was seen as the reason for the bank's abrupt decision to reverse course and cut interest rates from 17 percent in December last year, to 15 percent in January 2015.

- Written by CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld