UniCredit Group -

The Russian Ministry of Economic Development has prepared its new macroeconomic forecast for 2011-2014, which will be used to develop the next federal budget.

The forecast is based on a $105 per barrel outlook for the Urals oil price in 2011. The ministry expects oil prices to fall to $93/b in 2012, but rise back to $97/b by 2014. Based on these oil prices, the government expects the economy to expand by 4.2% in 2011, and to stay below this level until 2014, when it is expected to accelerate slightly to 4.6%.

Domestic demand is set to be the major driver of economic growth. Thus the government expects investment to rise by 6.0% in 2011 and to accelerate to some 9.6% in 2014. Consumer demand is also set to support economic expansion as real disposable incomes and retail sales bottom out in 2011 with weak 1.5% and 3.8% growth respectively, but then should accelerate to 5% and 6% respectively by 2014. Apparently, the government expects domestic consumer demand to get a boost from the expected slowdown in inflation, which is expected stay below 7.5% in 2011, and to fall gradually to 5.0% by 2014.

Russia's trade surplus is expected to stay in a healthy surplus throughout the entire forecast period, even though it is expected to shrink from some $195bn in surplus in 2011 to $91.9bn by 2014. A persistent trade surplus should ensure general stability for the ruble, which is expected to fluctuate close to RUB28/USD1 all the way until 2014.

Cautiously realistic

Overall, we view the new government forecast as cautiously realistic, even despite what we see as rather supportive oil price assumptions. The forecast is rather close to our outlook on most major parameters, even though we are a bit more conservative in our long-term assessment of economic growth; we expect 3.5% real GDP growth in 2014.

We believe that the major market impact of the forecast will be delivered through the new federal budget, which is to be based on it. We think that such moderate expectations of economic growth, despite the rather high oil price forecasts, might suggest that the government is likely to maintain its relative austerity mode in spending, which is being advocated by the Ministry of Finance. Thus we believe that the forecast suggests a lack of any major ambitions to accelerate economic growth in the near future, which, we think suggests that the government does not plan any drastic structural changes in budget spending or economic policy. We think this should minimize and potential market impact of the news.

We do not expect any major market impact from the news as the forecast is likely to suggest a lack of any major changes in budget policy over the next several years.