COMMENT: Russia could withstand a Grexit, but not a Spexit

By bne IntelliNews May 30, 2012

Renaissance Capital -

The result of a Greek exit (Grexit) for Russia would be a mild recession. While some argue that a Grexit may facilitate a quicker adjustment in the Eurozone, as the south improves its competitiveness and the core builds up its strength, the potential economic impact on all concerned would certainly be painful. In contrast to the current trend of back-of-the-envelope calculations, we use statistical methods to estimate the effect of such an event on the Russian economy. In the event of an orderly Grexit and assuming a fall in Eurozone GDP of 1% (vs the consensus estimate of 0%), we calculate that Russian GDP growth could slow to 2.0% in 2012 (vs our 3.0% baseline) and 2.9% in 2013 (vs our 4.5% baseline). Even in the event of a disorderly Grexit and assuming a fall in Eurozone GDP of 3%, we estimate that Russia would experience only a mild recession next year (-0.2% vs the +4.5% baseline), with broadly flat output in 2012.

Only a complete breakdown of the Eurozone with a Spanish exit (Spexit) would cause a deep recession. For the sake of completeness, we also consider a much more onerous scenario, in which a Grexit is quickly followed by a Spexit, as the Eurozone disintegrates and its GDP tumbles by 6%. In this case, we estimate Russia would experience a sizable decline in output, with GDP contracting 2.7% in 2012 and then falling a further 5.0% in 2013.

Oil prices could fall to $57 per barrel following a Spexit. Our econometric model allows us to calculate the impact the three separate crises scenarios would have on oil prices. We estimate an orderly Grexit would bring Brent oil prices down to $101/b in 2012 (vs our $110/b baseline) and to $105/b in 2012 (vs our $110/b baseline). A disorderly Grexit reduces our oil price estimates to $84/b in 2012 and $94/b in 2013. Finally, a Spexit would mean oil prices collapse to $57/b in 2012 and $77/b in 2013 on our estimates.

Increased macroeconomic flexibility should ensure that, even in the event of Spexit, Russia would see a smaller contraction than in 2009. Now that the Russian central bank is moving towards loosening its grip on the rouble, external shocks should be accommodated for, at least partially, by the more flexible exchange rate regime. We estimate this could limit any decline in GDP by about 40%. Russia's positive real interest rates could also create ample scope for a swift reduction in policy rates, to cushion declining output and stabilise any banking sector difficulties. In contrast to 2008, the economy is not overheating, which suggests that external shocks should be less damaging. At the same time, the fiscal authorities now have less space to conduct aggressive countercyclical policy; although low indebtedness levels point to a healthy ability to borrow.

Key vulnerabilities have been reduced. While foreign currency buffers are more limited now, the maturity structure of Russia's external debt is much more favourable, pointing to reduced vulnerabilities. The state's backstopping of short-term currency loans at the height of the 2008 crisis did not go in vain. While the overall level of foreign indebtedness has now exceeded pre-crisis levels, short-term loans have declined substantially from $110bn before the crisis to around $70bn now. More importantly, this fall is almost fully accounted for by a fall in private sector short-term indebtedness. Consequently, the reserve cover of short-term debt has increased dramatically.

The maturing Russian consumer should mean less-violent swings in consumer behaviour. While the 2008/2009 crisis saw the FX share of consumer deposits move in tandem with the depreciating rouble. More recent episodes of currency weakening, including that of the summer of 2011, broke this trend. This change in consumer behaviour has been largely driven by the successful transition to a more flexible exchange rate policy following the 2008/2009 crisis.

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