150730 russia watch

Group Economics Emerging Market Research

Russia Watch

Peter de Bruin +31 20 3435619

Early signs of stabilisation

30 July 2015 

The recession deepened significantly during the second quarter,…



…but there are some tentative signs that the economy has passed the eye of storm



Recent bout of ruble weakness unlikely to stop process of monetary policy easing



Growth set to return in 2016, though oil price weakness poses a downside risk

Steep contraction in Q2 on the cards,…

outlook, there are some tentative signs that that the economy

Incoming data suggest that Russia’s recession deepened

has passed the eye of the storm.

significantly during the second quarter. The surge in inflation, while recently having come down somewhat, has continued to

Imports to continue to fall significantly

erode households’ real purchasing power. As a result, real

%yoy

retail sales were down by almost 10% in June. The economic

40 30 20 10 0 -10 -20 -30 -40 -50 -60

weakness has also made companies reluctant to invest.

Investment fell by more than 7% (yoy) in June. Against this background, industrial production has fallen significantly, with output being down by almost 5%. Taken together, monthly data are in line with a contraction of the economy of around 6% in Q2. This marks significant deepening of the recession compared to Q1, when the economy shrank by 2.2%.

-20 -10 0 10 20 30 40 50 60 70 80 04 05 06 07 08 09 10 11 12 13 14 15 Imports National Accounts

Russia’s recession deepened significantly in Q2

USD/RUB (%yoy, rvs)

%yoy Source: Thomsons Reuters Datastream

15 10

For instance, after having fallen for three quarters in a row,

5

consumer confidence rose from -32 in Q1 to -23 in Q2. In 0

addition, once having corrected for seasonal patterns, it

-5

appears that vehicle sales have found a bottom, while the decline in real retail sales is levelling off.

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

GDP tracker

Source: Thomsons Reuters Datastream

Has the economy passed the eye of the storm? %yoy

10

20

0

15

-10

10

…despite deep fall in imports

-20

5

The worsening of the economy probably would have been

-30

0

-40

-5

-50

-10

even more severe, if it had not been for the steep depreciation of the ruble. Granted, this sharply raised import prices, but it also led to a significant fall in imports. According to detailed National Accounts data, imports fell by 25% yoy in the first quarter of the year. Moreover, given the softness in domestic

-15

-60 99

01

03

05

07

Consumer confidence (la)

09

11

13

15

Real retail sales (ra)

demand and ongoing weakness in the ruble, we think that the slide in imports has much further to go.

Source: Thomsons Reuters Datastream

Signs that economy has passed the eye of the storm

Inflation has started to come down…

What is more, although the recent renewed weakness in oil

Meanwhile, after peaking at 16.9% in March of this year,

prices is providing some downside risks to the economic

inflation declined to 15.3% in June. The recent weakening of the ruble might lead to some upward pressure on prices again.

2

Russia Watch – Early signs s of stabilisatio on 30 July 2015 5

How wever, the big picture is that inflation will co ontinue to come e

FX X reserves hav ve stabilised

dow wn steadily oncce the effects of o the ruble dro opping off a cliff ff

An nother positive development is that the centtral bank’s FX

at the t end of last year and the beginning b of this year will fall

re eserves have sttabilised, after these between n the beginning g of

outt of the annual comparison, and a the weakne ess of the

last year and Ma arch of this yeaar declined by a total of $153b bn.

eco onomy will weig gh on prices.

his partly reflec cts that the CBR R has bought around a $10bn of Th foreign FX since e the middle of May, but the more m important

Ru uble slides on n oil prices again...

re eason is that ca apital outflows hhave receded. While in the

bps s

level

13 30 12 20 11 10 10 00 9 90 8 80 7 70 6 60 5 50 4 40

20 0 30 0 40 0

fourth quarter of last year, a staaggeringly larg ge $76.2 flew out off the country when the financiial system was s on the verge of o co ollapse, the am mount of moneyy that was withd drawn in the firrst qu uarter declined to $32.5bn, beefore falling to $20 in the second qu uarter.

50 0 60 0

conomy to gro ow again in 20016, but lowerr oil prices a risk r Ec Ta aken everything together, we think the recession will slowlly

70 0 13

12

14

Brent oil prrice (lhs)

start to moderate e in the secondd half of the year. Lower sures should ggive households more breathing inflationary press

15

Ru uble to dollar (rhs, inverse scale)

pace, helping consumption c too stabilise. Mea anwhile, reduce ed sp un ncertainty shou uld also help invvestment to sta art growing aga ain.

Th he upshot is that the economyy should bottom out around the t

Sou urce: Thomsons R Reuters Datastream m

turn of the year, before growingg modestly nex xt year. The big g prompting the e central bank to continue to o loosen polic cy …p

uestion, of course, is how thee economy will deal with the qu

This has prompte ed Russia’s cen ntral bank to ag ggressively

re enewed bout off oil price weakkness. Indeed, we recently

loosen monetary policy. It has lo owered its key policy rate from m

lowered our 2016 year-end foreecast for Brentt oil from $80 a

% to 11.5% ove er the past months. We think that this proce ess 17%

arrel to $65 a barrel. b For now w, we keep our 2016 GDP growth ba

has s further to go. Admittedly, the e renewed ruble weakness th hat

forecast of 0.5% unchanged, bbut lower oil prices do pose a

we saw over the p past days bring gs back memories of the

do ownside risk to our growth ouutlook.

ancial crisis at tthe end of last year, promptin ng the authoriti es fina to take t a more ca autious stance. For instance, while w we think

K forecasts forr the economy of Key o Russia 2 2012

2013

2 2014

2015e

20 016e

pau used its purcha ases. We also think t that the central c bank willl

GDP (% yoy)

3.4

1.3

0.6

-4.0

0.5

cutt its key rate at a gentler pace e than earlier th his year at this

y) CPI inflation (% yoy

5.1

6.8

7.8

15.0

6.0

-0.1

-0.5

-0.5

-3.6

-2.5

9

10

10

13

15

3.6

1.7

3.0

5.0

4.0

ment (% GDP) Gross fixed investm

21.9

21.8

20.6

17.9

17.3

vings (% GDP) Gross national sav

28.4

24.5

23.5

21.3

2 20.6

USD/RUB (eop)

30.4

32.7

61

50

45

UR/RUB (eop) EU

39.4

45.1

73

50

52

tha at the CBR soon will start to buy foreign FX again, a it recenttly

Frid day’s meeting. But, the bigge er picture will be e that falling inflation and a we eak economy will w keep the CB BR in a looseniing

udget balance (% GDP) Bu

ode. We therefo ore continue to o think that its key k rate is mo

Government debt (% % GDP)

hea ading to 9% at the end of the year.

% GDP) Current account (%

...b but CBR to continue loose ening its poliicy %, CBR’s key policyy rate

18 8 16 6 14 4

Bu udget b alance, cu urrent acc. for 201 5 and 2016 are ro ounded figures

12 2

Source: EIU, ABN N AMRO Group Economics E

10 0 8 6 4 04

05

06

07

08

09

Sou urce: Thomsons R Reuters Datastream m

10

11

12

13

14

15

3

Russia Watch – Early signs s of stabilisatio on 30 July 2015 5

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