COMMENT: Russia’s economy in 2015 – more resilient than expected

By bne IntelliNews March 26, 2015

Mark Adomanis in Philadelphia -


How is Russia’s economy doing right now? Pretty clearly, the answer is “not very well.” 2014 was the first year since Putin came to power in which, due to a combination of spiking inflation, plummeting oil prices and flat-lining growth, the average real disposable income actually shrank. The economy still managed to eke out 0.6% overall growth, but no one, not even the Kremlin, could dispute the blackening outlook and the general sense of malaise. There is a universal consensus that 2015 will be worse. But exactly how much worse? Here the answer is not at all clear.

Anders Aslund was a particularly high profile member of what can be called the "disaster caucus", the people who think that Russia's economy is headed for implosion. He predicted that 2015 would see a recession that would lop off somewhere between 8% and 10% of total output, substantially worse than the crisis year of 2009.

Needless to say, Aslund's forecasts seems unduly pessimistic. Yes the current mood is grim, but it's nothing like the blind panic which was gripping the world financial system in the aftermath of the collapse of Lehman Brothers. In contrast, Russia's current crisis has been a slow-motion one. Things haven’t happened all at once, it’s been a slow drop of bad news over the course of a year. Market participants are all too aware of what is likely to happen. That will likely make resolution of the crisis more difficult (it seems a virtual certainty that the current recession will be more protracted than 2009’s) but it also means that panicked uncertainty, which was a hallmark of 2009, is absent. 

Outside of the Russian finance ministry, which predicts a modest recession in 2015 and a return to 2-2.5% growth as soon as 2016, other estimates broadly expect a contraction of somewhere between 4% and 6%. The latter figure is the position of market economists and credit ratings firms, while the slightly more optimistic figure is the product of the Central Bank of Russia (which estimates that the economy will shrink by 0.7% over the first quarter of this year).

Bad or worse?

But while a contraction of 4% is bad, it’s a lot better than 6%. So which seems more likely? Well Rosstat's initial first-quarter GDP estimate has, obviously, not yet been released, since we're still in the midst of the first quarter. Rosstat did, however, release industrial production figures for the January-February period. These are the most broad-based and accurate data that we currently possess about the actual state of the Russian economy. And what do they suggest? Well, the result certainly wasn't overly sunny; total production decreased by 0.4% in comparison with the analogous period in 2014, but neither was it disastrous.

On a sector-by-sector basis the extractive industries were the best performers. Despite the recent swoon in commodity prices their output in the first two months of 2015 actually increased by 0.7% on year. On the other hand manufacturing fared the worst, with output down by 1.5% in comparison to 2014. Of particular note was the disastrous performance of the automobile sector, where production was down a full 17% from the year before.

The month-by-month breakdown was a bit strange in that January actually saw a small (0.9%) year-over-year increase while February saw a deeper (1.6%) decline. The acceleration of the decline in February is worrisome, and it means that the March data will be very important in more clearly ascertaining the economy's real trajectory. If March’s figures are worse than February's, it would suggest that Russia will experience a recession closer to the expectations of credit analysts and market economists (eg. a contraction of between 5% and 6%). However, if March’s figures are either stable or marginally improved, it would suggest that Russia is likely to end up on the more optimistic side of the forecasts with a total contraction of somewhere between 3% and 4%.

Moving forward, the most important variable is going to be the price of Brent crude, which has been fluctuating wildly as the US Federal Reserve debates when it will raise interest rates. If oil resumes the modest rally it experienced from late January through mid-February, before retreating against in early March, Russia will probably end up on the optimistic side of the forecasts. If oil resumes its downward march, though, Russia’s economic performance will inevitably deteriorate.

That’s the important takeaway, though, the conditional nature of all of these forecasts. No one knows exactly what Russia’s economy is going to do, it’s all a matter of probability. Given what has happened so far in 2015, particularly the relatively modest overall decline in industrial production and a modest rally in the value of the ruble, it seems as if the looming recession will be on the modest end of the spectrum. That could change, of course, but the data seem to indicate a bit more dynamism and resilience than expected. 

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