150601 russia watch

Group Economics Emerging Market Research

Russia Watch

Peter de Bruin +31 20 3435619

A deepening recession

1 June 2015 

April data suggest that Russia’s recession is deepening



As a sharp deterioration of the economy was expected, financial markets have kept their nerves,…



…even though the CBR is now pursuing a policy of replenishing its foreign FX reserves



Jury is still out on whether the stabilisation in Russia’s FX reserves will last

April data suggesting that recession is deepening

from higher import prices due to the past ruble weakness

April’s round of data revealed that Russia’s recession is

drops out of the annual comparison. In turn, this should help to

deepening. Due to the past ruble weakness, consumer prices

limit the erosion of households’ purchasing power, moderating

rose by 16.4% compared to a year ago in April. As a result,

falls in consumer spending. With consumption showing signs

households are seeing their purchasing power being eroded.

of stabilising, companies should slowly start to invest again. In

Real wages fell by more than 13% in April compared to the

addition, lower inflation should enable the central bank to

same month last year. This led to a plunge in real retail sales

continue to bring down its policy rate. And, looser financial

of almost 10% yoy. Meanwhile, the uncertain economic

conditions should also help the economy to find some ground

backdrop has prompted firms to continue to shelve their

towards the end of year, before returning to modest growth in

investment plans. Accordingly, investment remained about 5%

2016. All in all, we think that the economy will contract by 4%

lower than levels seen a year ago. The reduced economic

this year, following an 0.5% expansion in 2016.

activity is clearly leaving its mark on industrial production. It decreased by 4.5% yoy in April, following a 0.6% drop in

However, financial markets have kept their nerves

March, while May’s manufacturing PMI fell from 48.9 to 47.6.

The worsening of the economy has come against a backdrop

All in all, April’s and May’s round of data clearly implies that

of relative stability in financial markets though. Admittedly,

Russia’s recession has taken a turn for the worse.

over the past days, we have seen some renewed ruble weakness, but this mostly reflects the recent softness in oil

Russia’s recession has deepened,…

prices. Indeed, since the end of January, when USD/RUB

%yoy

peaked above 70, the ruble has strengthened by around 25%.

15

What is more, while remaining at levels higher than countries with more or less comparable sovereign credit ratings, CDS

10

spreads have remained on a downward trend, with spreads 5

having come in to around 300bps. Finally, despite recently

0

giving up some of its gains, the Russian MICEX equity index is up by around 15% since the beginning of this year.

-5 -10

…but financial markets have kept their nerves

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

GDP tracker

bps

level

750

75 70 65 60 55 50 45 40 35 30

650 Source: Thomsons Reuters Datastream

GDP tracker in line with contraction of around 5 - 6%

550 450

Indeed, according to our GDP tracking estimate, the economy

350

is set to contract by around 5 - 6% in the second quarter. This

250

would be considerable worse than the relatively modest 1.9%

150 Jan/14

decline in economic activity that we saw in the first quarter of this year, which had prompted some commentators to argue

Apr/14

Jul/14

CDS (lhs)

Oct/14

that the end of Russia’s economic malaise was in sight.

Looking further down the road, we think that the third quarter will mark another quarter of sharp contraction, but the deepness of the recession should abate thereafter. This reflects that inflation is expected to fall sharply as the boost

Jan/15

Apr/15

Russian ruble to $US (rhs)

Source: Thomsons Reuters Datastream

2

Russia Watch – A deepenin ng recession 1 June 2015

CB BR has started d to replenish its FX reserve es…

ompared to the e total outflow thhat we have se een over the pa ast co

The e relative calmness in financial markets has s prompted

on ne and a half years. Indeed, ssince the begin nning of last year,

Russia’s central b bank to start replenishing its FX F reserves. In n

almost $150bn of o FX reserves have seeped out o of the coun ntry,

th

s on the 14 of May, the central ba ank mentioned its statement

bn, Russia’s poool of reserves is still sizeable e. though at $360b

tha at it intends to p purchase $100-200 million wo orth of foreign currrency per tradiing day. Since the 14th of Aprril, the average e

Oil O price key for f developm ment FX reserv ves

am mount of purcha ases has avera aged $212 millio on, slightly morre

$bn

tha an the CBR hass indicated.

$/barre el

7 700

16 60

6 600

14 40

dibility,… …rrisking its cred

5 500

12 20

Wh hile the decision n of the CBR came c as a surp prise to us, and d

4 400

the e market, it did not lead to sha arp movements s in the ruble.

3 300

Still, it begs the question why the CBR has res sorted to a policcy

2 200

of buying b FX rese erves. After all, it was just in November N that

40 0

1 100

0 20

the e central bank m moved to a free e floating curre ency, only to se ee it selling large am mounts of FX re eserves to try to o halt the steep p

10 00 80 0 60 0

0

0 03 04 05 06 07 08 09 10 11 12 13 14 15 Reserves (lhs)

de in the ruble iin December of o last year whe en Russia’s slid

Brent oil pricee (rhs)

eco onomy was in tthe midst of a severe s banking g crisis. So, at the e very least, the e decision seem ms to be at odd ds with the

So ource: Thomsons Reuters Datastreaam

cen ntral bank’s lon ng-term strategy, and some may m argue that the e bank’s credibiility could even n be at stake.

But oil price de evelopments re remain key he CBR’s move e notwithstand ing, the biggerr influencer in Th

but helping its s external pos sition to stabilise,… …b

terms of Russia’s reserves will be developme ents in the oil

Tha at said there is some merit in the decision as a well. Buying

prrice. Indeed, it was w the plungee in oil prices that ignited the

$10 00 - $200 millio on of foreign cu urrencies on a daily basis wou uld

ru uble crisis last year, y as it laid bbare the overdependence of the

dire ectly boost the stock of Russiia’s foreign FX reserves by

ec conomy on ene ergy. Working iin the opposite direction, we do d

$25 5bn - $50bn pe er year. Althoug gh the most important driver o of

no ot think that it is s a coincidencee that there are e some tentativve

the e ruble will rema ain the develop pment in the oil price, FX

sig gns that Russia a’s FX reservees have started to stabilise

purrchases will alsso weigh on the e currency som mewhat. This w will

ro oughly around the t same time that the oil pric ce seems to ha ave

ma ake imports more expensive and a hence supp port the countrry’s

found some footing. With 70% of Russia’s ex xports consistin ng

currrent account surplus, leading g to a larger infflow of foreign

off energy, movements in oil priice are the key y determinant fo or

currrencies. While difficult to preccisely estimate e, the total effecct

the amount of ha ard currency thhat flows into th he country and for

of the t central ban nk’s changed po olicy on Russia a’s FX reservess

the health of the economy morre generally.

is therefore likely to be somewhat larger. oo soon to giv ve the all-clea r signal To and further un nderpinning market m sentime ent …a

In this respect, itt is encouraginng to note that, despite the reccent

The e central bank’s decision could also help to bolster markett

enewed softnes ss in oil prices, our energy an nalyst continuess to re

sen ntiment. In partticular, if financcial market partticipants were tto

se ee Brent oil bou uncing back to $65 per barrel at the end of this t

believe that the economy has moved m through the t eye of the

ye ear. Still, we think it is too sooon to raise the all clear sign fo or

storm, though as we mentioned earlier, incoming data are

Russia’s reserve es. While the ceentral bank’s changed c FX policy

g this is not yett the case. Imp proved optimism m clearly suggesting

er the tentativee stabilisation in Russia’s FX wiill help to bolste

mit capital outflows somewha at, implying tha t would probably lim

re eserves, there remains r a risk oof ongoing cap pital flight, in

ere would be lesss of an outflow w of foreign currency. the

pa articular now th hat the recessioon is deepening. As such, we e arre sceptical whether the stabiilisation in Russia’s FX reservves

Efffects will be sm mall compared to total loss s Still, the size of th he amount of fo oreign FX reserves that the CB BR will be able tto accumulate is likely to rem main small

wiill last.

3

Russia Watch – A deepenin ng recession 1 June 2015

K forecasts forr the economy of Key o Russia 2 2012

2013

20 014e

2015e

20 016e

G GDP (% yoy)

3.4

1.3

0.6

-4.0

0.5

C inflation (% yoyy) CPI

5.1

6.8

7.8

15.0

6.0

-0.1

-0.5

-0.5

-3.5

-2.4

9

10

10

13

15

3.5

1.6

3.0

3.0

2.5

G Gross fixed investm ment (% GDP)

21.9

21.8

20.6

17.2

17.0

G Gross national savvings (% GDP)

28.4

24.5

23.5

21.4

20.5

USD/RUB (eop)

30.4

32.7

61

50

45

EUR/RUB (eop)

39.4

45.1

73

50

52

Budget balance (% % GDP) G Government debt (% % GDP) C Current account (% % GDP)

Budget b alance, cu urrent acc. for 2014,2015 and 2016 are rounded figurres

S Source: EIU, ABN N AMRO Group Economics E

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