LONDON: A combination of the plunge in oil prices, the fall of the rouble, high inflation and financial sanctions have caused the Russian economy to contract significantly year on year basis, according to Charles Movit, Senior Economist at HIS.
“These negative factors have weighed heavily on domestic demand, dampening both private consumption and investment in fixed capital.
“While the first-quarter figure is perhaps less severe than might have been expected given the cards that have been stacked against the Russian economy, we expect the recession to deepen in succeeding quarters, particularly due to continued isolation of Russia from international capital markets.
“RosStat has published a flash estimate of Russian GDP in the first quarter of 2015 that puts it 1.9% lower than the same quarter a year earlier. In light of the very significant decline in world-market oil prices over that period, the surge in inflation due to the ensuing depreciation of the rouble against major currencies, and the economic sanctions that have essentially isolated most Russian institutions, public and private, from international capital markets resulting in very tight credit conditions, the only surprise this data release provides is that the downturn was not more severe. Selected indicators on the production side have been more buoyant than might have been anticipated given the very discouraging figures on developments in domestic demand. As this cannot be explained by external demand (manufacturers continue to report declines in export orders), the other possibilities that suggest themselves is the build-up of inventories of finished goods and an import substitution effect on the back of the devalued currency.
“Several of the negative factors weighing on Russian economic activity have recently eased moderately. World-market oil prices have recovered some of their lost ground, actually exceeding $60 per barrel for dated Brent crude in the past week or so and with it the rouble has regained some traction as well, peeking over the RUB50 per USD mark. In fact, it has been reported that the Central Bank of Russia was buying foreign currency in the last several days. The bank’s stated purpose was to replenish its foreign exchange reserves, but most analysts speculated that the bank hoped to prevent the further strengthening of the rouble as that would dampen the roubles generated for the state budget by the repatriation of export earnings. Additionally, the April consumer price inflation report actually saw the first decline in the index for many months, since January 2014, from 16.9% y/y in March to 16.4% in April. If the pace of price increases in early May were to continue through the remainder of the month, we would expect the y/y rate of inflation to slip somewhat further to 16.0%.
Nevertheless, export earnings will continue to sag, they were down by 27.6% y/y in the first quarter and were 31.1% lower in March. The rouble is likely to remain at the RUB50 to the dollar level at best for some time. Inflation will remain in the double-digits for months to come. Last, even if some sanctions are weakened in order to induce Russia to withhold support for Ukrainian separatists in the interest of preserving the Minsk II ceasefire, some financial sanctions are likely to remain in place to prevent backsliding and these will continue to impact credit provision in Russia, particularly as the economic downturn will exacerbate the problem of non-performing loans for Russian banks. Thus we do expect the recession to deepen in succeeding quarters. Our most recent forecast for GDP in the full-year 2015 is for a decline of 4.7% y/y, up modestly from the 5.0% decline in the preceding forecast round.