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Russia Country Risk Report Q1 2016

Russia Country Risk Report Q1 2016

Core Views

President Vladimir Putin's popularity remains near record highs. We expect this to suffer moderate declines as the reality of economic hardship begins to be realised by the general public. Despite the deterioration in economic conditions and high inflation we do not expect any mass uprising.

Persistently low oil prices, weak investment growth and declining real incomes will prevent a swift recovery in the economy in 2016.

Russia will maintain a current account surplus in 2016 and 2017 as imports remain subdued. Over the coming quarters we expect little financing pressure to emerge in the economy as its large international reserves remain sufficient to entirely cover maturing obligations during 2016-2017.

Russia's fiscal position is strained and the government is in a difficult position as it strives to maintain social and military spending in the run-up to the 2016 election.

Major Forecast Changes

We maintain our real GDP growth forecast for 2016 at 0.5%. However, we have downgraded our forecast for 2017 from 2.3% to 1.7% y-o-y as lower oil prices will prolong a recovery in the Russian economy.

With inflation proving sticky and oil price declines keeping depreciatory pressure on the rouble , we now expect monetary easing to proceed at a slower pace. We have revised up our end-2016 forecast to 7.00%, from 6.00% previously.

Following the announcement of the 2016 federal budget, which includes higher spending and more conservative revenue estimates, we have increased our budget deficit forecast from 2.5% to 2.8% of GDP. We have revised our 2017 deficit forecast from 2.0% to 2.2% of GDP.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Regional Elections: Implications For 2016 Vote
Russia's regional elections previewed what should be expected at the national legislative elections in 2016. Regional elections showed
a dominant performance by the ruling parties and ample controversy regarding the fairness of voting and opposition repression.
International Relations I
Syria To Raise Russia-West Tensions; Moscow Risks Long War
Russia's apparent prioritisation of targeting Western-backed Syrian rebels over Islamic State will raise tensions with the West, although
the latter will largely be powerless to halt Moscow's strikes. Russia itself risks getting caught up in an unintended clash with the West or
being dragged into an open-ended conflict.
International Relations II
Geopolitical 'Surge' Unsustainable, As Economy Suffers
Russia's military activism since the late 2000s will prove difficult to sustain, given the country's weak economy and poor demographic
outlook.
TABLE: SOVIET AND RUSSIAN MILITARY INTERVENTIONS SINCE 1945
Long-Term Political Outlook
Putin Facing Far Greater Challenges Over 2016-2024
President Vladimir Putin will face tougher political challenges over the coming decade, as a result of a deterioration in relations with the
West, a weaker economy, ongoing demographic decline, and the Islamist insurgency in the North Caucasus. Although Putin's popularity
stood at near record-highs in July 2015, economic disruption means that his support will fall, and that he will face increased opposition
later this decade.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Further Consumer Hardship In 2016
Persistently low oil prices, weak investment growth and declining real incomes will prevent a swift recovery in the Russian economy in
2016. The recovery will accelerate in 2017 as lower inflation supports real incomes and stronger demand fosters investment, although
we have revised down our real GDP forecast from 2.3% to 1.7% for that year reflecting downward revisions to our oil price forecasts.
GDP By Expenditure Outlook
TABLE: GDP
TABLE: PRIVATE CONSUMPTION
TABLE: GOVERNMENT CONSUMPTION
TABLE: FIXED CAPITAL FORMATION
TABLE: NET EXPORTS
Fiscal Policy and Public Debt Outlook
Reserve Depletion Ahead Despite Fiscal Belt Tightening
Russia's fiscal position is strained and the government is in a difficult position as it strives to maintain social and military spending in the
run-up to the 2016 election. Subdued oil prices over the coming years will lead to significant depletion of the Reserve fund, weighing on
Russia's sovereign profile.
External Trade And Investment Outlook
External Position Remains Bright Spot
Russia will maintain a current account surplus in 2016 and 2017 as imports remain subdued. Over the coming quarters we expect little
financing pressure to emerge in the economy as its large international reserves position remains sufficient to entirely cover maturing
obligations during 2016-2017.
Outlook On External Position
TABLE: TRADE BREAKDOWN BY COUNTRY
TABLE: TRADE BREAKDOWN BY CATEGORY
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Currency Forecast
Sustained Oil Weakness To Weigh On RUB in 2016
We expect the rouble to depreciate gradually over the course of 2016. Though market volatility will be lower than 2015, policy
uncertainty, persistently low oil prices, and a narrowing of the rouble's interest rate differential will all result in a downward trajectory for
RUB.
TABLE: BMI CURRENCY FORECAST
Monetary Policy
Cautious Easing Ahead In 2016
As inflation continues to abate in 2016, we expect policy rate cuts to continue in Russia, albeit at a slower pace than 2015. Rouble
stabilisation will cause imported inflation to wane, while severely weakened domestic demand will be a drag on prices.
Monetary Policy Framework
TABLE: MONETARY POLICY
Chapter 3: 10-Year Forecast
The Russian Economy To 2024
Structural Deficiencies Weighing On Growth
We forecast Russian growth to slow markedly over our 10-year forecast horizon, with average real GDP growth of just 2.2 % between
2016 and 2024. During this period the economy will shift increasingly towards domestic demand, with private consumption to account for
53% of total GDP in 2024, up from 49% in 2012. While we expect Russia to converge towards developed standards of wealth, structural
risks including a weak business environment, poor institutional capacity and declining population pose major challenges to long-term
growth.
TABLE: LONG-TERM MACROECONOMIC FORECAST
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Education
TABLE: EMERGING EUROPE - EDUCATION RISK
TABLE: GRADUATES OF TERTIARY EDUCATION ('000), 2010-1012
Government Intervention
TABLE: EMERGING EUROPE - GOVERNMENT INTERVENTION RISK
Chapter 5: BMI Global Macro Outlook
Global Outlook
Exit The Dragon
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

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