Russia Country Risk Report Q2 2015
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.
- Table: BMI CURRE NCY FORE CAST
- 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: BMI VER SUS BLOO MBER G CONSENSUS REAL GDP GRO WTH FORE CASTS, %
- Table: Em erging Markets , Real GDP Growth , %