Oil price declines have put a Russian economic recovery out of reach in ----, when we forecast real GDP to contract by -.- . Households will continue to bear the brunt of the recession, as rouble depreciation, elevated inflation and government budget cuts drive further declines in purchasing power and real incomes. ...Indeed, real government consumption growth remained relatively flat through Q---, the latest quarter in which a full breakdown of GDP by expenditure is available. With the ---- budget originally drawn up on an assumption of USD--/bbl oil, this strategy will prove unsustainable and significant spending cuts and tax hikes will have to be imple- mented in order to avoid a more severe depletion of reserves with destabilising effects on fiscal sustainability and sover- eign creditworthiness. With military expenditures appearing untouchable, households and small businesses will inevitably feel the pinch of upcoming government belt tightening. ...The Central Bank of Russia (CBR) has left its main policy rate steady at --.- since August ---- in light of sticky inflation, in turn keeping borrowing costs prohibitively high for many corporates and households. In line with the CBR s relatively - Business Monitor International Ltd www.bmiresearch.com
...Source: Russia Federal Statistics Service, Bloomberg hawkish stance over the past year, we now expect it to stay on hold until H---, and have revised up our end----- policy rate forecast from -.-- to -.-- . Western financial sanctions will also remain in place until Q--- at the earliest, limiting public and private sector access to capital markets and further impeding a recovery in lending and fixed investment. Russia s imposition of sanctions in ---- against Western and Turkish agricultural products has stoked inflation via higher food prices, but has also propped up the economy to a degree by boosting the agricultural and food manufacturing sectors. That said, overall manufacturing activity has been very weak despite buoyant food manufacturing, and there is little evi- dence so far to suggest that rouble depreciation and import substitution have had a significant impact in boosting Russia s non-energy industrial sector. Investment in productive capacity remains in deep contraction, boding poorly for future output, while manufacturing confidence in December ---- fell to its lowest point since January ----. ...We forecast real GDP growth to accelerate to -.- in ----, but remain bearish on medium to long-term growth potential given lower oil prices and lack of reform momentum.
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