Russia Country Risk Report Q4 2018
Russia is emerging from recession but its 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.
Vladimir Putin's overwhelming election victory presages a continuation of his tough foreign policy towards the West, and an economic policy that will deliver only limited reforms.
Russia's sovereign profile is strong, given a large international reserve pile, low public debt, and stable current account and net international surpluses. That said, major fiscal reforms are needed, including an overhaul of the pension system, to ensure long-term sustainability in light of lower commodity prices and an ageing demographic profile.
The Central Bank of Russia's shift to a free floating rouble and adoption of an inflation targeting regime has brought major dividends in terms of financial stability and a taming of inflation. Over the coming years we see inflation converging towards a long-term average of 4.0%, owing to the central bank's increased cred-ibility as well as to Russia's very weak long-term growth potential.
From a foreign policy perspective, while relations with the West will remain on ice, the prolongation of US and EU sanctions will not pose major headwinds to the economy. In addition to that, we expect Russia will increasingly exploit opportunities to foster closer ties with eastern nations, amongst others China, Japan and even North Korea.Major Forecast Changes
Against an increase in inflationary risks, we now expect the Central Bank of Russia to keep its key rate on hold at 7.25% until end-2018, while we previously expect further easing this year.
Growth drivers will be elusive in the absence of a significant ramp-up in structural reform momentum. In addition to that, the outlook is further clouded by rising political tensions with the West. Overall, risks are tilted towards a weaker growth than we currently are forecasting, given the potential for oil prices to undershoot our forecasts and for political tensions to escalate.
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