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2015: the black hole
Since 2014, Russia has dealt with multiple shocks, both political (Ukraine crisis) and economic (falling price of oil), that have resulted in lower tax receipts, high capital outflows, currency depreciation (the rouble has lost almost 50% of its value relative to the dollar), soaring inflation and a recession in 2015 that may have caused GDP to fall by more than 4%.
With capital outflows limiting corporate access to foreign financing, the falling rouble increasing the cost of borrowing in foreign currencies and the central bank dramatically raising its interest rates – leading to tighter credit conditions – investment fell amidst a weak international economic climate marked by high uncertainty. Turning to demand, the deteriorating labour market (rising unemployment), combined with falling real income and the high cost of loans, has hit household consumption hard. Fiscal policy, under pressure due to falling oil revenue has therefore not been able to serve as an adjustment variable. What’s more, despite the currency’s tumble, export growth has been limited as a result of weak global demand.
2016: divided opinion amidst an uncertain international economic climate
Although the consensus view predicts that Russian GDP growth will stabilize at zero in 2016, there is a substantial divergence of opinion, with Swedbank (-2%) at one extreme and Goldman Sachs at the other (+1.5%). Adding to the uncertainty surrounding the international economic climate (China’s slowdown, commodity price volatility, the normalisation of US monetary policy, etc.) political (such as the crisis in Brazil) and geopolitical turmoil (Daesh) is increasing. These factors are further complicating economic forecasting for countries highly vulnerable to the economic uncertainty created by China’s slowdown and the fall in the price of oil. Russia is one the most typical examples of this forecasting difficulty. In fact, with commodity exports representing more than 70% of total exports and China as its other largest export market after the European Union, Russia is facing an accumulation of handicaps, not to mention the Ukraine crisis for which no solution has yet been found.
The rate of Russia’s recovery depends on the development of these three major factors of uncertainty. With a growth forecast of -1.8% in 2016 and zero growth in 2017, we are at the low end of the consensus view. However, we note that international institutions such as the OECD and the IMF are also not particularly optimistic, forecasting 2016 GDP growth of -0.4% and -0.6%, respectively, despite the fact that these two institutions are not especially known for being negative. Furthermore, it is worth looking at the forecast of Russia’s central bank (CBR). In the CBR central scenario, predicated on oil at $50 per barrel and continued sanctions, 2016 GDP growth is estimated to be between -1% and -0.5%.
Low commodity prices and weak global demand will continue to hamper the recovery
A number of assumptions underpin our scenario and our growth forecast. Firstly, with respect to supply (strong) and demand conditions (the slowdown linked to emerging market economies and to China), our view is that there is little reason for commodity prices to rise and return to previous levels. In this sense, it would be inappropriate to compare this recession with the ones that took place in 1998-1999 and 2008-2009 when, after a slide in GDP of more than 10%, the Russian economy returned to positive growth after a few quarters thanks to sharp rises in the price of oil.
Recent developments seem to point to a further downtrend in the price of Brent. In fact, during the week of 14 December, the price of oil fell below $40 (see our editorial in our weekly letter of 11 December 2015). This could just be a temporary phenomenon linked to the reaction of the markets to the OPEC meeting and the decision not to put a cap on production. Oil could therefore recover but without reaching particularly high levels.
Budgetary policy is not expected to have enough latitude to actively stimulate economic activity. Furthermore, we think that to avoid fiscal slippage and contain debt, new budgetary limitations will have to be put into place. Lastly, public consumption could still erode a further 0.8% in 2016 (See table on GDP Growth and its components).
In our central scenario, we foresee the stabilisation of world growth at 3.1% and a slowdown in Chinese growth to 6%, insofar as foreign demand is not expected to be a major supporting factor. For 2016, we are betting on a 1.5% increase in Russian exports, that is, below 2015’s level due to the stabilisation of the rouble.
Investment and household consumption are projected to not be as bad, but are not expected to make a spectacular rebound either
Turning to investment, according to some analysts, the end of the sanctions imposed due to the Ukraine crisis could deliver a sharp boost. In particular, as we point out in our article 3 (Portfolio bond flows: each BRICS country has its own story!), it could foster the return of domestic capital. However, inflows of foreign capital, a priori more dependent on oil price developments, could be limited in a climate of low prices. Therefore, even if the sanctions were lifted, which has yet to be seen, the impact on investment could be limited. Conversely, the rouble’s tumble has led to competitiveness gains which, although not reflected in a massive increase in exports, could draw in foreign direct investment given cheaper labour and thereby promote investment.
Likewise, assuming the price of oil and the rouble stabilise, inflation should decelerate and allow the central bank to reduce its key interest rates (we foresee a 125 bp cut in key interest rates by the end of 2016). Investment is therefore likely to get a boost from monetary easing and stronger domestic demand. In fact, lower inflation coupled with lower rates should help drive consumer spending. Nonetheless, without a labour market recovery and higher nominal wages, household consumption is not expected to return to a growth track. In 2015, the fall in household consumption is expected to approach 9%. In 2016, we foresee a further modest decline (-1.7%). Overall, investment is expected to continue fall, but to a lesser extent than in 2015.
2017: light at the end of the tunnel?
In conclusion, if there are no further shocks, Russia should return to positive growth rates in 2017. In fact, after a drastic adjustment, domestic demand should bounce back. However, the adjustment in response to the sharp drop in commodity prices may take longer than in the past. Furthermore, the sanctions arising out of the Ukraine crisis will not foster a rapid recovery. In the medium term, commodity prices are likely to remain at sustainably low levels and the commodities market will certainly be marked by high volatility. In this kind of environment, Russia, in the absence of structural reforms allowing it to limit its dependence on the energy sector, could see its growth potential erode, particularly since its population is ageing.
Between the conflict in Ukraine and plummeting
With our forecast of -1.8% growth for 2016, we are at the low end of consensus view
The external environment (commodity prices and global demand) will continue to hamper the recovery
Few domestic supporting factors in 2016
If there are no further shocks, Russia should return to positive growth rates in 2017
PhD, Senior Economist
Alessia BERARDI, Debora DELBÓ, Abhishek GON, Karine HERVE, Yerlan SYZDYKOV