After two years of recession, Russia’s GDP returned to 1.5%yoy real GDP growth last year on the back of higher oil prices, rebound of the rubble and sharp drop in inflation.
It is worth noting, that this was below our forecast (1.7%) and below the target of the Government (2%). Due to lower base effects, we already revised down in February our forecast for this year from 2% to 1.7%.
But all in all, we remained constructive on the recovery as there were still some supportive factors in the pipeline to promote real GDP growth: decreasing inflation, further rate cuts from CBR, oil price at a high level and a favourable external environment (China’s deceleration is gradual, advanced central banks will normalize only slowly, possible easing of sanctions at end of July, etc).
However, risks are now clearly tilted to the downside. The US Treasury Department last week announced significant new sanctions against leading Russian business elites (7), their companies (12) and government officials (17).
On the energy side, Gazprom CEO Alexei Miller is a notable addition, in that Gazprom’s natural gas operations had largely escaped past sanctions because of European concerns about effects on regional gas supplies.
Market reacted massively on last Monday: Russian stocks suffered their worst performance in 4 years and the rubble fell 4% versus USD.
In 2014, the sanctions aimed at limited new debt issuance of many companies, the existing stock of assets was not affected.The Friday’s sanctions look harder although applied to a small number of companies for the time being. Adding names to SDN list means cutting them off from dollar system and prohibiting anyone around the world to deal with the sanctioned name at a risk of punishment from the US.
In such a context, no doubt that growth will be penalized. The question is, by how much?
In 2015, the IMF1 published an ex-ante estimate of the (isolated) effect of sanctions on the Russian economy, which would amount to 1% to 1.5% of GDP over one year, and cumulative effects up to 9% of GDP in the medium term.
In 2016, the World Bank published2 a lower estimate (one figure), assessing the positive effect of a possible lifting of sanctions at 0.9% of GDP over a single year, followed by 'a supposedly complete normalization.
Many uncertainties remain on these estimates. Looking through different press articles releases one might also find that the cumulative effect of sanctions on Russian GDP until the end of 2016 would have been only slightly higher than 1 % of GDP.
The direct impact on real GDP growth is than very hard to estimate. Indirect effects, especially through a tightening of financial conditions for the whole economy could be much more detrimental. First,uncertainty and new pressures on the rubble might force the CBR to slow/postpone (even though cancel) further rate cuts. Second, inward investment could be deterred and some outflows could also foresee both either direct investments or portfolios investments. Currently, foreigners hold around 1/3 of Russian Government Bonds.
The global impact of these additional sanctions on GDP would mainly rely on where markets settle and if further sanctions are installed.
Considering the different estimations mentioned above, we can guesstimate that on a 1 year horizon, the impact on growth could be anywhere from0.2-1.0%-pt.
1. “Russian Federation: 2015 Article IV Consultation – Press Release; and Staff Report”, IMF Country Report No. 15/211, August 2015
2. “Russia Economic Report: The Long Journey to Recovery”, Russia Economic Report no. 35, April 2016