RaboResearch - Economic Research

Economic Update Russia

Economic Update


Russia’s economic growth has continued to slow this year and we expect 2.2% growth in 2013. The central bank is likely to loosen monetary policy amid falling inflation. The government’s stimulus measures are justifiable, but no effect is expected in the very short term.

Russia : Economy has fallen into a recession

Russia’s economic growth continues to slow down(figure 2). GDP contracted in 13Q1 by 0.1% q-o-q and 0.3% in 13Q2, meaning that the  economy is now in a technical recession. According to the GDP breakdown per sector, natural resource extraction was the strongest performer with 2.9% q-o-q growth. In contrast, three major sectors; finance, construction and manufacturing declined by 1.7%, 1.4% and 1.2% respectively. Agricultural output was nearly unchanged, but given the reports of a bumper harvest, agricultural output is expected to rise in 13Q3.  Going forward, the PMI data show some positive signs as producer sentiment improved slightly in August. But even so, the level of the composite PMI (49.4 in August) is still not consistent with growth. Against this backdrop, we decided to revise downward our growth estimate for 2013 to 2.2%, from 2.8% previously. 

Table 1: Key economic data
Table 1: Key economic dataSource: IMF WEO, EIU
Figure 1: Russian growth slows
Figure 1: Russian growth slowsSource: EIU

Interest rate cuts likely

We expect the Russian Central Bank (CBR) to loosen monetary policy in 13Q4 because inflation concerns are receding. Inflation peaked this year in May at 7.4%, and has been falling since, reaching 6.5% in August as food price inflation eased (figure 3). Also, government pressure on the CBR to loosen monetary conditions to stimulate bank lending has persisted amid the growth slowdown. We expect looser monetary policy to support growth from 13Q4 onwards.  

Since the Fed announced that it plans to dial down the rate of its asset purchases on May 22, the ruble depreciated by 4.9% against the US dollar (figure 4). We consider this to be modest compared to the depreciations seen by some other emerging countries such as Indonesia and India. An important reason is that Russia runs a current account surplus and the ruble is supported by external demand for oil. Given Russia’s sizeable amount of foreign exchange-reserves and solid external liquidity position, we believe the probability of a currency crisis to be low. 

Figure 2: Interest rate cuts likely
Figure 2: Interest rate cuts likely Source: Bloomberg
Figure 3: A moderate ruble depreciation
Figure 3: A moderate ruble depreciationSource: Russian Central Bank

No short-term effect expected from fiscal stimulus

In our previous economic update, we stated that a fiscal stimulus package was financially feasible given Russia’s solid fiscal position and its large reserves worth USD 170bn(figures 5 and 6). More details of the stimulus plan were announced in July, which has three key elements. The first is increased support for SME’s, including improved access to credit and targeted tax breaks. This is a sound policy because smaller companies are facing increased difficulty to access credit, with interest rates hovering between 15-17%, according to SME Bank Russia. The second measure is to cut regulatory cost faced by banks in an effort to limit lending rates from rising. The third element is to use USD 14bn of oil savings from the Reserve and National Welfare funds for major infrastructure projects. We are delighted to see that this stimulus package focuses more on easier credit conditions and increased capital expenditures instead of higher public sector wages and pension benefits, as in 2009. However, we remain cautious and do not expect short-term positive effects for several reasons. For one, details remain patchy, which is a concern as implementation has always been a problem in Russia. What’s more, the timing is unclear and many measures seem likely to take effect next year. Finally, the size of the stimulus via capital expenditures (infrastructure projects) is rather small, USD 14bn is equivalent to only 0.6% of GDP, and is spread over several years. 

Figure 4: Sound fiscal balance
Figure 4: Sound fiscal balanceSource: EIU
Figure 5: Reserves provide wiggle room
Figure 5: Reserves provide wiggle roomSource: Bloomberg

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