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Russia Country Risk Report Q2 2015

Russia Country Risk Report Q2 2015

Core Views

President Vladimir Putin's popularity remains near record highs. Weexpect this to suffer moderate declines as the reality of economichardship beings to be realised by the general public. Political influencewill remain in favour of defence and security hardliners. Thiswill have fiscal consequences as military spending continues toremain high.

Prolonged lower oil prices during 2015 will have a negative impacton economic activity. High inflation will negatively affect consumer'spurchasing power resulting in a reduction in private consumption.

This reduction in private consumption is reflected in our balanceof payments forecast. Though we expect exports to decrease, dueto a significant fall in imports we expect to see a current accountexpansion during 2015.

Monetary policy will remain relatively tight during 2015. A decreasein the rate of inflation in H215 will allow for monetary easing. Themonetary authority will be eager to reduce rates so as not to inhibiteconomic activity and stifle the banking sector with high borrowingcosts.

Major Forecast Changes

Following heavy depreciation in the rouble we now forecast thecurrency to average RUB62.50/USD during 2015.

We have upwardly revised our inflation forecast in light of roubledepreciation. We expect Russian inflation to peak in Q215 beforebeginning to gradually decline, averaging 14.0% during the year. TheCBR will reduce its main policy rate to 11.0% in an attempt to returnto monetary policy normality and not impede growth unnecessarily.

We have made a large downward revision to our growth outlook. Thisis due to lower oil prices constricting output, rising prices reducingconsumer's purchasing power and an unfavourable business environmentdue to high rates. We now forecast the Russian economyto contact by 5.2% in real terms in 2015 before growing return togrowth in 2016 with a 0.3% expansion.

We now forecast Russia's current account balance to make a shortlivedexpansion during 2015 due to diminished imports before continuingto narrow after that. We expect the current account balanceto expand to 3.3% of GDP in 2015. After this we see it decreasingto 2.6% of GDP in 2016.

Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Putin To Remain Insulated From Economic Backlash
The Kremlin's willingness to withstand Western economic and financial sanctions indicates a shift in influence to the hardliner security
establishment. This will have fiscal implications and may ultimately give way to incidents of social unrest amidst reduced government
support for already ailing sectors of the economy.
Table: Politic al Overview
Foreign Policy
High Conflict Escalation Risks, But Long-Term Deadlock To Prevail
The conflict in Eastern Ukraine faces a high risk of escalation in early 2015, as Kiev and Moscow seek to strengthen their positions.
However, a territorial deadlock between the two sides remains the most likely long-term outcome.
Long-Term Political Outlook
Putin Facing Far Greater Challenges Over 2015-2024
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 a record 88% in October 2014, the likelihood of 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 Activity
Factors of Contraction: Rouble, Rates, And Rising Prices
Russia's economy will fall under severe strain during 2015. A combination of a weakened currency and rising inflation will suffocate
consumer demand resulting in a fall in private consumption. Meanwhile tight credit conditions in reaction to this inflationary pressure will
severely restrict business activity during the year resulting in a significant investment decrease.
Table: GDP By Expenditure
Fiscal Policy
Economic Downturn Will Force Anti-Crisis Measures
The onset of a severe economic downturn during 2015 will induce the government to enact counter-cyclical fiscal policy. This will result
in an increase in government expenditure while revenues fall on the back of lower oil prices. Tapping into the nation's wealth fund will
mitigate some of this fiscal burden; nevertheless we expect Russia's budget deficit to increase to -1.8 % of GDP in 2015.
Table: Fiscal Policy
Balance Of Payments
Brief Surplus Expansion As Imports Contract
Russia's current account surplus is set to expand in 2015 as imports contraction exceeds the pace of falling exports. Lower oil prices
in dollar terms will result in a contraction of exports by value. Meanwhile, weakened economic conditions and a growth slowdown
will cause imports to fall. Following this current account expansion in 2015, the surplus will begin to steadily recede again over the
subsequent years.
Table: Current Account
Monetary Policy
Multifaceted Mandate For CBR In 2015
The Central Bank of Russia faces a difficult year as it balances sometimes conflicting goals of inflation targeting, currency stabilisation,
and avoiding choking off economic activity with contractionary monetary policy. We see rates remaining elevated until H215, after which
we see abating inflationary pressure allowing for further easing.
Table: Monetary Polic y
Exchange Rate Policy
Rouble Reprieve In 2015
In the short term we expect selling pressure on the rouble to recede. We see the currency consolidating and eventually reaching
its upper limit in 2015. Beyond that we expect the rouble to appreciate slightly over the next two years before returning to gradual
depreciation due to structural economic weakness.
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 2.7% between
2016 and 2023. During this period the economy will shift increasingly towards domestic demand, with private consumption to account
for 57.1% of total GDP in 2023, 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 Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
Table: Operational Risk
Availability Of Labour
Table: Em erging Eu rope - Availabi lit y Of Labour
Table: Labour Force Emp loyment By Sect or ('000)
Crime Risk
Table: Crim e Statistics
Chapter 5: Key Sectors
Table: Aut os Total Market - Hist oric al Data And Forecasts
Food & Drink
Table: Food Consumpti on Indic ators - Hist oric al Data & Forecasts
Other Key Sectors
Table: Oi l & Gas Sect or Key Indic ators
Table: Pharmaceutic als & healthc are Sect or Key Indic ators
Table: Infrastructure Sector Key Indicators
Table: Telecoms Sect or Key Indic ators
Table: Defenc e & Secu rit y Sect or Key Indic ators
Table: Freight Transport sector Key Indicators
Chapter 6: BMI Global Assumptions
Global Outlook
Weaker EMs To Weigh On Growth
Table: Global Assumpti ons
Table: Developed States, Real GDP Growt H, %
Table: Em erging Markets , Real GDP Growth , %

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