Russia: Economic Profile

The Russian economy may be finally bottoming out next recording a 4.6% yoy contraction in 2Q15, the sharpest in six years. However the increase outlook remains bleak due to structurally lower oil prices, existing sanctions and lack of structural reforms.

Russia, is a country located at Eastern Europe, it has an area of 17,098,250 Km2, and it is the largest country in the world.

Russia, with a population of 143,440,000 people, it is one of the most populous country in thw world and it has a low population density, 8 people per km2.

The capital is Moscow and its currency is Russian Rubles

Russia is holding the 12 position by nominal GDP. Its national debt in 2015 was 217,748 millions of dollars, ( 15.94% debt-to-GDP ratio) and its public debt per capita is 1,518$ dollars per inhabitant.

The last annual rate of CPI published in Russia was on June of 2017 and it was 4.4%.

In terms of the human development index (HDI) of Russia, which is the index used by the United Nations to measure the progress of a country, was 0.798 points in 2014, leaving it in 51th place in the table of 187 countries published.

If the reason to visit Russia are business, you must know it's in the 40th of the Doing Business ranking , which provides objective measures of business regulations for local firms.

Strengths (+) and weaknesses (-)

(+) Strong external position

Despite adverse developments that have significantly weakened the country’s external position in 2014, Russia’s external position remains strong. The country has been running trade and current account surpluses for years in a row and still possesses vast amounts of FX-reserves.

(+) Strong fiscal position

Even though government deficit as a % of the GDP has been steadily increasing Russia still has a relatively low government deficit of around 13% of GDP (2015e). The 3% budget deficit for 2015 and 2016 will be covered from the reserve fund.

(-) Weak governance and weak policy of law

Corruption is a deeply embedded phenomenon, severely hindering the business environment, particularly (but not only) for foreign investors.

(-) High dependence on single commodity export revenues

Lack of diversification makes the Russian economy additional susceptible to the falling request on the commodities markets. Government revenues are highly dependent on revenues from fuel exports, therefore any adverse fluctuations feed into the government budget balance.

Key developments

1. The economy is in recession, stagnation is the majority likely perspective for 2016-2017

The Russian economy, severely hindered by the low commodity prices and sanction regime, has been showing disappointing results. GDP declined in excess of 4% yoy in both 15Q2 and 15Q3, which represents the steepest decline in 6 years. Some believe that the long awaited bottom has been reached and the economy is about to bounce back, however, given how fragile the Russian economy is to external factors, risks are tilted to the downside. Throughout 2015 GDP increase estimates have continuously been adjusted downwards. Hence it still remains a question whether the Russian economy will indeed show a clear return to increase in 2016. Domestic request likely remains supressed as inflation, which is still in excess 15%, continues to take its toll on real wages. Foreign direct investment has been severely undermined, with net FDI of USD 2.6bn in 15H1, the lowest reading since 2006.

In October, the Russian government approved the 2016 budget, with relatively realistic assumptions of the oil price at USD50/barrel and GDP increase of 0.7% in 2016. The projected 3% deficit will be financed from the Reserve Fund which currently holds USD 71bn. The fund will be unable to fully cover an extra deficit of similar magnitude in 2017. This situation underscores the need for structural economic/budgetary reforms, as using the funds in such a manner is not prudent. Given Russia’s low sovereign deficit, issuing new bonds remains a viable option in the short run, though no sustainable long term solution.

2. Ruble continues to show volatility

The beginning of the 2015 has been marked by the Ruble reaching its historical peak exchange rate of RUB 70/USD, inclunding vast amounts (USD 150bn) of the FX reserves having been burned in the course of 2014 to support the currency. As a result of positive oil price developments and the conclusion of the Minsk peace agreement the Ruble managed to strengthen to RUB 50/USD during the 2015, allowing the Central Bank to further lower the interest rate and start rebuilding the FX reserves. However the situation has proven to be extremely unstable: driven by the resumed downward pressure on energy and commodity markets and sporadic intensification of the conflict in the Eastern Ukraine, the Ruble has resumed a depreciation trend again, exceeding RUB 70/USD by the end of August 2015. In September and October 2015 the Ruble has been bouncing back and forth, currently remaining in the bandwidth between 60 and 70 RUB/USD, which is further confirming Ruble exchange rate’s extreme correlation with the oil price movements.

On the back of a depreciating ruble and persisting inflationary pressures the Central bank has slowed down its pace of interest rate cuts (currently at 11% since August 2015). The FX reserves have remained rather stable throughout 2015, currently standing at USD 375bn, inclunding gold reserves (October 2015), which represents an development compared to the trough of USD 356bn seen this spring. At current levels, FX reserves (excluding gold) cover additional than 170% of the 2015 deficit service, or 12 months of the 2015 imports.

3. The focus is shifting from the conflict in Ukraine to Syria

Next a turbulent year where Eastern Ukraine has been shaken by a military conflict with alleged Russian involvement, the ceasefire was finally completed in September 2015. As well local elections scheduled for the end of October 2015 have run smoothly, while the separatists abandoned the idea to run their own elections. The EU sanctions on Russia are to expire in January 2016, and the investment freezes and travel bans in March 2016; an extension of the sanctions is off the radar at the moment, particularly given the role that Russia has been playing in the Syrian conflict that is due connected to the critical refugee situation in Europe. At the end of September 2015 Russia has launched an airstrike campaign in Syria targeting ISIS and other terrorist groups (as well termed moderate opposition by the nations backing them), and at the same time supporting Assad’s forces. While the West supports Russia’s efforts in fighting the terrorism, there is no consensus (as well in the middle east) on Assad’s involvement in the resolution of this conflict. The US, Saudi Arabia and Turkey want Assad to quit instantly, while Russia and Iran are opting for a transition period that would allow him to remain in power, whereas the EU lacks uniformity in its position. Even though the political resolution to this conflict has from presently on to be found, Russia has in fact reinstated its position of a world player on the geopolitical arena.

Background information

Since the break-up of the USSR in 1991, Russia’s democratic ambitions have shifted in favour of a centralized semi-authoritarian national. As well Russia’s economy has undergone significant changes moving from an isolated, centrally-planned economy to a additional market-based and globally-integrated one. In the 1990s most significant industries were privatized, whereby strategic national assets ended up in hands of a small group of individuals, creating an oligarchic economy where the wealthy few had as well considerable influence in the Kremlin. However, since 2000, the power balance gradually began to shift and currently Kremlin maintains a firm grip on this elite.

However, according to most indicators governance standards have deteriorated in the completed decade and corruption remains deeply embedded on all levels, posing a challenge for businesses and individuals. Currently Russia is still in the top 10 major economies in the world. Demographics remain unfavorable, as the people of Russia has shrunk by 6m since 1992 driven by a lower birth rate, low male life expectancy from a European perspective and immigration. The Russian labor force is skilled, but there are shortages particularly in management and engineering.

While the level of infrastructure varies throughout the country, the roads are generally poor. Although the country’s economy is somewhat diversified, the non-energy sector is largely uncompetitive. Therefore, the economy is overly dependent on commodities production, particularly on the oil and gas sector that constitutes 2/3 of total exports. To sustain economic increase in the longer term, Russia has to find ways to diversify its economy away from the hydrocarbon sector, particularly by improving the business climate and introducing structural reforms.