Although surging hydrocarbon prices have helped boost growth, Russia’s performance has remained somewhat disappointing
MOSCOW, 4 OCTOBER 2011. Although surging hydrocarbon prices have helped boost growth, Russia’s performance has remained somewhat disappointing. After accelerating to 4.5% in Q4 2010, year-on-year GDP growth slowed to 4.1% in Q1 this year and then to 3.4% in Q2. Seasonally adjusted figures are not yet available, but we estimate that quarterly growth in Q2 slowed to just 0.4%, well below trend. The result was significantly below expectations, following reasonably solid readings for both industrial production and retail sales. The weakness was undoubtedly influenced by the worsening situation in the Eurozone, where growth slowed sharply amid mounting fears of a sovereign debt crisis. Market sentiment has worsened significantly, leading to a flight to quality. In Russia, this manifested itself in a sharp sell-off in the local equity market and a 5.8% depreciation of the RUB against the bi-currency basket. The most significant channel of contagion for Russia from slower world growth and increasing risk aversion is through its impact on oil prices, although thus far these have held up on supply concerns.
But with inflation continuing to fall, which in turn will boost real wages and deter any further increases in interest rates, and with last month’s budget setting out plans for a considerable near-term fiscal boost in terms of higher salaries and additional spending, growth prospects still appear reasonable. Following the weaker than expected H1, our 2011 GDP growth forecast has been lowered to 3.8% but the pace should start to pick up heading into 2012 as consumer demand strengthens. We also expect investment growth to accelerate despite mounting concerns about the global economy. Investment in the past six months has been constrained by political uncertainty, following President Medvedev’s decision to fire a number of key officials, but this should diminish given the proximity of the December elections, helping to lift investment growth to 9% in 2012 from just 2.3% this year. As a result, we expect GDP growth to accelerate to 4.4% in 2012.
Continued solid growth and high oil revenues are expected to lead to a further decline in the fiscal deficit in the coming years, despite higher state spending that is forecast to lift the deficit to 1.7% of GDP from just 0.2% expected this year. Unless the weaker global economic outlook leads to a collapse in world oil prices, the fiscal position in Russia should remain relatively favourable, in turn enabling state spending and investment to continue to support economic growth in the coming years.
But the weaker prospects now seen for Germany and Scandinavia, plus sharply lower growth in the rest of Europe, will inevitably mean that medium-term growth prospects are deteriorating. And oil prices are likely to be falling over the next few years as weaker global demand more than offsets production concerns in the Middle East. We expect oil prices to fall by about 6% in 2012, after a 39% surge this year, with a further 2.5% drop in 2013 (and if the global economy moves back into recession then oil prices could be considerably lower than we currently forecast). With the boost from high oil revenues starting to fade, GDP growth is now forecast to hold at close to 4.5% in 2013, but then slow to around 3.5% in 2014-15. Over the longer term, the prospect of continued subdued demand in Europe, the main market for Russia’s oil and gas, plus potentially lower oil prices, makes it even more unlikely that growth will return to the 7%+ levels seen in 2003-07.
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