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Russia Economic Review – From Recession to Growth


2017 is the year that Russia will come out of recession where it is in recent years, as the factors accelerating positive trend is the rise in oil prices and the strengthening hopes for easing or lifting the sanctions announced by the West.

The beginning of Donald Trump presidency gives reasons for optimism that relations between Russia and the US will be warmer during the four years, and trump government will eliminate or at least reduce the sanctions against Russia.

According to recent data, it seems that the Russian Central Bank very successful in his war against the country’s high inflation, and improved price stability enables the continued monetary easing through interest rate reductions.

energy prices were the main factors that will affect the Russian economy, but the state is also working to increase exports does not depend on the price of black gold. Almost all the economic data indicate economic improvement in Russia, which is expected to continue to be reflected also in asset prices in the Russian capital, as we saw in 2016.

Return to a growth trend

Russia is expected to exit recession and return to positive growth in the first quarter of 2017. The first three-quarters of 2016 the annual growth in Russia was negative compared with 2015 but shows a clear trend of improvement towards the return to positive growth.

Russia GDP Annual Growth Rate
Russia GDP Annual Growth Rate, Forecast 2016-2020, SOURCE: http://www.tradingeconomics.com

In 2017, the Russian GDP is expected to grow by between 0.5% and 1%, based on the price per barrel of $ 40, while the expectation is an even higher price. Stabilization of energy prices, combined with the ease Western sanctions and/or an increase in foreign investment can support a higher growth in 2017, at a rate of between 1.5% -2%.

The main factor affecting GDP growth is consumption, particularly private consumption. Drop in energy prices hit state tax revenues and led to a reduction in public consumption. The difficult economic situation also significantly hit consumer spending, which recorded a decrease of 1.9% in 2016 and 9.4% in 2015. You can assume that we have seen the bottom in private consumption, and in 2017 is expected positive growth of 1.3% compared to 2016.

Two positive economic indicators that support the forecast of private consumption improvement are: Consumer Confidence Index, showing consistent improvement from the first quarter of 2016, and the production index peaking in December 2016 positively.

Successful war in inflation

During the past year, the annual inflation rate in Russia slowed from 9.8% in January 2016 to 5.4% in December 2016. Although this figure is still high by Western standards, but it is indicative of a significant improvement in the stability of the Russian economy, by a significant reduction of risks arising from very high inflation.

The decrease in inflation was due to several factors such as a significant drop in the rate of increase in food prices due to improved agricultural output Russia, the strengthening of the ruble, the cheapening of goods and services and lower demand of consumers. Also, the high interest in Russia, which stands at 10%, contributing to a preference for saving over consumption and thus supports the trend of moderation in the rate of inflation.

Russia Inflation Rate
Russia Inflation Rate, Forecast 2016-2020, SOURCE: http://www.tradingeconomics.com

The Russian central bank left interest rates at a level of 10% in the last two meetings, in October and December 2016. The goal of the central bank to support the continued moderation in inflation to reach the target range, an annual inflation rate of 4% in 2017.

The interest rate is very high in Russia relative to other Western countries, but the current interest rate reflects a significant economic improvement in the last two years. At the end of 2014, the interest rate was approximately 17% – and has since declined steadily, up to the present. The continued decrease in inflation will support the central bank’s ability to continue to outline cuts in interest rates and thus support the economy and the domestic capital market. As of this time, the central bank expects continued lowering of interest rates around mid-2017, depending on energy prices and annual inflation rate.

Russia Interest Rate
Russia Interest Rate, Forecast 2016-2020, SOURCE: http://www.tradingeconomics.com

A never-ending affair – Russia and the black gold

Wrong write about the Russian economy without regard to the price of oil. The Russian central bank and Ministry of Finance basing their work premises on the basis of the price of a barrel of oil. One of the main reasons for the economic improvement in Russia in recent times is due to the increase in the price of oil to its lowest level around $30 current price around $50.

Agreement cutting oil production of the oil-producing countries (OPEC) significantly reduced the risk that oil prices will return to its lowest level, especially in the short term. Medium-term factors still weighing on the oil price rise, such as overcapacity, high inventories, greater flexibility of oil producers and relatively low global growth. In view of these reasons, the Russian central bank prefers to be conservative in its assumptions, and use the oil barrel price of $ 40 only when constructing economic models. Of course, the price of a barrel of oil higher will support better economic results than the central bank estimates now, which leaves the possibility L’hftaot ‘positive about the state of the Russian economy.

Russia’s reserves, accumulated during the period of high oil prices, have decreased significantly over the past two years. If this trend continues, Russia’s economic stability is questionable, so Putin’s interest to do almost everything to the price of oil will rise. Meanwhile, Donald Trump, the incoming US president, also will be happy to see the price of oil higher. When two great powers want a very specific scenario to happen and created a meeting of interests between them, they can act in many ways to bring the desired reality. If the price of oil indeed be higher, all the economic forecasts of the Central Bank of the Russian turn out to be very conservative and risk of the Russian economy will be dampened significantly.

Stabilization of the ruble and sharp increases in the capital market

The exchange rate of the ruble – the Russian currency is not stable in recent years. Russian economic crash of 2014 and the middle of 2015, has also led to the collapse of the ruble against the dollar. In the past year, there has been a change in this trend. Economic improvement also led to the strengthening of the ruble against the dollar. The exchange rate stood at above 80 rubles to the dollar in early 2016, is now somewhere around 60 rubles to the dollar.

Russian Ruble
Russian Ruble, SOURCE: http://www.tradingeconomics.com

Apart from the increase in the value of the ruble, 2016 was a good year also shares the Russian stock exchange. Not surprisingly, the majority of the shares related to the energy sector and financial markets, thus rising energy prices and the ruble is so significant, contributed to the strengthening of shares in Russia when both private consumption sector continues to strengthen. The RDX index is a measure of the Russian flag and its performance over the past year (about 61%) clearly reflect the positive trend which is in the local stock market.

RDX vs MSCI EM
RDX vs MSCI EM, SOURCE: https://www.bloomberg.com/quote/RDXUSD:IND

Despite the surge in the Russian index is still far from the 60% of its peak set in May 2008. There is no doubt that a return to a growth trend consistently, parallel to expansionary monetary policy by lowering interest rates, together with the continued rise in energy prices is expected to support a further rise in share prices in 2017 also Russian.

In conclusion

Russia’s economy is in the final stage of the transition from recession to regrowth. Even based on conservative assumptions relative to the price of a barrel of oil in the $ 40, the Russian economy is expected to continue to show improvement in the next two years. Russia has a very strong incentive to try to cause an increase in energy prices, and for the first time, Russia’s interests and the United States converge, and which the return to the OPEC as a cartel continues to add certainty regarding the supply of oil.


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