While dissatisfaction with poor economic conditions and corruption appears to be on the rise, Vladimir Putin looks set to remain the frontrunner ahead of presidential elections in March 2018, still benefitting from high approval ratings and a weakened opposition. Russia’s economy is emerging from recession, but we forecast growth over coming years to remain subdued when considering the scale of the downturn since 2014. Growth will be capped by the country’s structural inefficiencies, amid a lack of progress in the implementation of much-needed reforms.
Russia’s long-term growth potential is subdued, closer to that of mature developed economies rather than a higher growth emerging market. This is due to the highly centralised nature of its economic model and large government footprint in key sectors, reliance on energy exports, poor business environment, weak investment growth and lack of structural reform momentum.
Russia’s external position will remain a bright spot for the economy despite a fall in the price of its main commodity exports, with the current account surplus remaining in relatively robust surplus in the coming years as imports remain subdued. Over coming quarters we expect little financing pressure to emerge in the economy as its large international reserves position remains sufficient to entirely cover maturing external obligations.
While Russia’s fiscal position is bolstered by low public debt ratios and fiscal reserves at its disposal, the sovereign profile will deteriorate in coming years and major fiscal reforms – such as an overhaul of the pension system – will be necessary to ensure long-term sustainability of the public finances in light of lower commodity prices.
Major Forecast Changes
Political risk has intensified on the back of diminished prospects of a rapprochement with the west in the near term.