150501 russian watch

Russia Watch Panic abates

Group Economics Emerging Market Research Peter de Bruin +31 20 3435619

1 May 2015 The Russian central bank cut its key rate by a larger-than-expected 150bp during its meeting on April 30. This reflects that the panic that we saw at the end of last year which forced the CBR to hike rates to 17% in order to stem the slide in the ruble has abated. Meanwhile, the upward momentum in inflation is diminishing. It should soon start to come down as the rise in import prices on the back of the past weakness in the ruble will fall out of the annual comparison. Another reason that inflation will come down is that spare capacity will open up due to the deterioration of the economy. Incoming data suggest that output contacted by 3% yoy or so in Q1, as higher inflation bit into households’ real purchasing power, while firms shelved their investment plans due to the weak economic backdrop. However, with inflation coming down, the central bank should continue to loosen policy, while households’ purchasing power will be eroded at a slower pace. This should help the economy to stabilise, prompting companies to invest again. In short, the deepness of the recession should start to subside from Q2 onwards, with the economy set to stabilise in Q4, and post modest growth again in 2016.

CBR cuts rates by 150bp as panic abates,…

will be sustained. But over the past one-and-a-half months, FX

The Russian central bank reduced its main target rate by

and gold reserves seem to have broadly stabilised at around

150bp to 12.50%. The move, which marked the third

$350bn.

consecutive decrease in a row, was larger than the 100bp rate cut that financial markets had been looking for. Since the start

…as financial stability returns…

of the year, rates have now been lowered by a cumulative

bp

450bp. All this reflects that the panic at the end of last year, which forced the central bank to hike rates to 17% in order to halt the steep slide in the ruble, has abated. Indeed, while the ruble weakened somewhat after the central bank’s

750

550 450

dollar since the beginning of the year, helped by a gradual rise

350

in oil prices. Meanwhile, in tandem with an appreciating ruble,

250 150 Jan/14

250bp since their peak.

75 70 65 60 55 50 45 40 35 30

650

announcement, it has appreciated by around 14% against the

CDS-spreads have come down sharply, falling by around

index

Apr/14 CDS (lhs)

Jul/14

Oct/14

Jan/15

Apr/15

Russian Ruble to $US (rhs)

Central Bank continues to loosen policy Source: Thomsons Reuters Datastream

%

18

…and upward momentum in inflation decreases

16

Another reason that probably prompted the central bank to cut

14

rates by more than expected is that the upward momentum in

12

inflation is decreasing. Consumer good prices rose by 1.2%

10

mom in March, following a 2.2% gain in February, and a 3.8%

8

increase in January. This suggests that inflation, which has

6

been fuelled by the past weakness in the ruble and reached a staggeringly high of 16.9% in March, is about to peak in

4 04

05

06

07

08

09

10

11

12

13

14

15

coming months. It should start to come down later in the year as the effects of higher import prices starts to fall out of the

Source: Thomsons Reuters Datastream

annual comparison, and spare capacity opens up due to the weakening of the economy. Incorporating these trends into our

There are also some tentative signs that capital outflows are

projections, we think that inflation will fall to around 11% at the

becoming less intense. Net private capital outflows were

end of the year.

$32.6bn in the first quarter, a significantly smaller amount than the $77.4bn that was recorded in the final quarter of last year.

Unfortunately, these data can be volatile from quarter to quarter. So the jury is still out whether the decrease in outflows

2

Russia Watch – Panic abates 1 May 2015

…while inflation is about to peak

Data in line with a contraction of around 3% yoy in Q1

%yoy

%yoy

18

15

16

10

14

5

12 Exp.

10

0 -5

8 6

-10

4

-15 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

2 10

11

12

13

14

GDP

15

GDP tracker

Source: Thomsons Reuters Datastream

Source: Thomsons Reuters Datastream

…and economy sinks deeper into recession

Another sharp contraction in Q2 is on the cards,…

A final reason behind the larger-than-expected rate cut is that

These trends should continue in the second quarter. Another

incoming data are all suggesting that the economy is sinking

sharp contraction in economic output is therefore a near

deeper into recession. For instance, in March, real retail sales

certainty. However, as explained above, inflation should start

fell by 8.7% compared to a year ago, keeping the series on a

come down sharply in the second half of the year. This should

steep downward trend. Consumers not only have to cope with

allow the central bank to continue to significantly loosen

a gradual rising unemployment rate, but the sharp rise in

monetary policy. Indeed, barring another escalation of the

inflation has also dented their real purchasing power, forcing

Russia/Ukraine crisis and/or another sharp fall in oil prices, we

them to tighten their purse strings.

expect the central bank to bring its key rate all the way to 9% at the end of the year. This should help financial condition to

Real retail sales falling off a cliff

become less tight and hence support economic activity.

%yoy

25

…but situation should gradually improve thereafter

20

Meanwhile, a drop in inflation in the second half of the year

15

should also imply that consumers’ real purchasing power will

10

be eroded at a slower pace, helping the fall in consumption to

5

diminish. Finally, as the economic situation slowly stabilises,

0

companies should gradually start to invest again. All this

-5

suggests that, as Russia’s economic headwinds slowly

-10

become less powerful, the economy should start to stabilise at

-15 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

the end of the year, before returning to modest growth in 2016.

Key forecasts for the economy of Russia 2012

2013

2014

2015e

2016e

GDP (% yoy)

3.4

1.3

0.6

-4.0

0.5

CPI inflation (% yoy)

5.1

6.8

7.8

15.0

6.0

-0.1

-0.5

-0.5

-3.8

-2.3

8

8

8

11

13

3.5

1.6

3.0

3.0

4.5

Source: Thomsons Reuters Datastream

Meanwhile, investment has also continued to decline. It was down by 5.3% in March, as firms continued to shelve their

Budget balance (% GDP)

investment plans against the weak economic backdrop.

Government debt (% GDP)

Finally, while industrial production held up better in March than

Current account (% GDP)

the 1.9% drop that was expected, falling by just 0.6% yoy, the manufacturing PMI fell back from 49.7 to 48.1. It has remained

Gross fixed investment (% GDP)

21.7

21.4

19.7

15.8

15.3

below the 50-mark that separates growth from contraction for

Gross national savings (% GDP)

27.9

24.2

23.4

20.1

20.5

USD/RUB (eop)

30.4

32.7

61

50

45

EUR/RUB (eop)

39.4

45.1

73

48

50

four months in a row. All this suggests that the economy shrank sharply in the first quarter of this year, probably by around 3% yoy or so.

Budget b alance, current acc. for 2014,2015 and 2016 are rounded figures

Source: EIU, ABN AMRO Group Economics

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Russia Watch – Panic abates 1 May 2015

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