RaboResearch - Economic Research

Russia: Slowdown continues, stimulus expected

Economic Update


The most recent data shows that economic growth continues to slow down. Retail sales and industrial production growth slowed in annual terms and the trade surplus fell in April. The continued stagnation in fixed investment remains worrisome since it means Russia faces an era of lower trend growth. There have been talks of a fiscal stimulus package, which is feasible given Russia’s healthy public finances. However, it is not without risks in the long term. Monetary loosening is likely in 13H2 as inflation is expec­ted to fall and the central bank is likely to succumb to government pressure to boost growth. 

Source: IMF WEO, April 2013, EIU

April data dissapoint

April data showed signs of a continued economic slowdown. Industrial production grew by 2.3% y-o-y in April, from 2.6% in March. A slowdown in private consumption growth is reflected in retail sales, which grew by 4.1% y-o-y in April, a tad weaker than 4.4% in March. The external environ­ment also remains weak, which is evident in a fall of the trade surplus by 21% y-o-y in April. The IMF estimates GDP growth for 2013 to be 2.8%. The Eurozone debt crisis hurting external demand and the fall in fixed investment are our main concerns going forward.Figure 1

Source: Bloomberg

Slump in fixed investment continues

Investment in fixed capacity contracted, in annual terms, for the second consecutive month in April (-0.7% y-o-y). Russian policymakers have pinned the blame on a number of large state companies that have started to scale back their investment plans in recent months. However, investment has been broadly stagnant for a year now. The bigger picture is that Russia should markedly improve its business environ­ment towards foreign investors to boost invest­ment. If Russia fails to shift to a more invest­ment-led growth model, this would mean a markedly lower GDP trend growth (around 3%) in the coming years, (currently it is 6-7%).

Figure 2

Source: Bloomberg

A fiscal stimulus seems feasible

Disappointing GDP growth has led to talks of a fiscal stimulus package. This appears a feasible option given Russia’s solid fiscal position. It runs balanced budgets and its public sector debt is among the lowest of the world at (8% of GDP). On top of this, the government has accumulated USD 170bn of oil revenues in the Reserve and National Welfare Funds. For example, the IMF estimates that if the government would use all of the Reserve Fund (4% of GDP) to increase investment in infrastructure, this could boost GDP by as much as 4%, assuming a fiscal multiplier on capital spending of 1. But the optimal scenario sketched here might not be realistic, as fiscal stimulus is not without risk. 

Figure 3

Source: EIU

But a fiscal stimulus is not without risk

Any stimulus is likely to focus on current spen­ding rather than capital investment as in 2008. The Kremlin is very impatient and not likely to wait for the lagging results from increased capital spending. Also, fiscal expansion is not without risk for public finances given its high reliance on oil revenues. The oil price needed to balance the budget stands around USD 115 per barrel in 2013. A spending increase of 1% of GDP raises the balancing oil price needed by USD 10 per barrel. Current spending such as increased pensions and public sector wages are politically difficult to unwind and could deterio-rate the fiscal position in the long term. 

Source: Reuters EcoWin

Stimulus via monetary policy possible

Currently, there is little room to loosen monetary policy to spur economic growth. In May, inflation was 7.4%, above the central bank’s (CBR) target rate of 5-6%. However, we expect infla­tion to fall as the pressure from rising food prices appears to be waning and the effects of the utility tariff hike last year should fall out of the annual comparison in July. As the newly appointed CBR chairman Elvira Nabiullina is more dovish than her conservative predecessor, it is likely the CBR will lower rates in 13H2. She is more likely to succumb to government pressure to support economic growth, especially if infla­tion falls in the coming months. 


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