Pain but no disaster in store for Russia, says Rencap

By bne IntelliNews January 20, 2015

bne IntelliNews -


If the average price of oil in 2015 is $60 then Russia's economy will contract by 4.3% and the ruble will be RUB56.4 to the dollar, say analysts at Renaissance Capital in a note released on January 20 exploring different oil price scenarios.

Oil prices have fallen from an average of more than $100 in 2014 to hover at about $50 at the time of writing, but a great deal of uncertainty remains over the average price it will settle at this year, ranging from the low $20s to a return to $100 by 2016, depending on who you talk to.

While Renaissance Capital believe that $60 oil is the most likely price, it went on to speculate that if oil averages $80 the GDP contraction will only be 1.7%; however, if oil averages $40, then the contraction will be 7.2%.

"Russia is facing a new and challenging environment given the drop in oil prices and Western sanctions. With oil at $60/bl, we expect Russian GDP growth to fall by 4.3% in 2015E after increasing by 0.6% in FY14E. Domestic demand is likely to drop significantly, while we see no government and central bank policy boost for growth. However, low unemployment, a lower level of de-stocking, and gains from a weaker currency limit the downside," according to the note written by economists Oleg Kouzmin and Charles Robertson.

The outlook is brighter for 2016, according to Renaissance, with positive growth of 2% with average oil at $80, but no change to the economy if oil remains at $60 next year as well. There was no estimate of growth at $40 oil in 2016, suggesting the bank, like Russian President Vladimir Putin, believes that oil prices are likely to start recovering in 2016.

The price of oil will also affect the "dollarisation" of the economy. One of the remarkable trends following the collapse of the ruble's value in December was how little foreign exchange the average Russian bought, preferring to put their money in fixed assets like apartments and luxury cars. In the 1990s Russian typically held a large part of their savings in foreign currency, but with almost a decade of a stable or appreciating currency, faith in the ruble has increased. That may change now: sustained low oil prices could lead to a re-dollarisation of the economy, says Renaissance.

"After the recent ruble spike, we expect confidence in the national currency to soften, which would increase dollarisation to the 25%-30% level and the ruble “fair value.” The ruble would look stronger if oil prices appreciate, but could weaken considerably with oil prices staying at $40/bl or below and dollarisation going towards 50% in the mid-term, in our view," the economists said.

The Central Bank of Russia's (CBR) decision to allow the ruble to float freely has had a beneficial effect on Russia's trade balance and the majority of commentators are predicting that Russia's current account surplus will increase this year as a result of devaluation and its affect on imports.

"The current account (C/A) surplus reaches $53bn in our base case (3.8% of GDP), as imports drop due to a weaker currency and a contraction in domestic demand," say Kouzmin and Robertson.

This prediction is more moderate than Fitch which forecasted last week a rebound in the current account surplus of $72bn (5.3% of GDP) in 2015 as imports shrink.

The free floating ruble and its ability to track oil prices down will serve as a significant cushion for the federal budget and, as a result, spiralling federal budget deficits is not one of the problems the government has to deal with.

"At nearly any oil price, the budget deficit is likely to be capped by around 2% of GDP, in our view. This is positive for long-term sustainability, but we think implies limited support for the economy in challenging times, which is in line with our growth forecasts," says Renaissance.

The ability of the ruble to move in step with oil prices will also allow the CBR to preserve its cash pile if it is willing to allow the ruble to fall in line with oil prices. The reason previous crises were so expensive (Russia spent $200bn on defending the ruble in 2008 and still had a 30% devaluation) was that the CBR was forced to try and keep the ruble inside an exchange rate corridor, which was only widened slowly.

Renaissance also have a much lower estimate for debt redemptions than many commentators, putting this year's bill at $75bn. Other commentators believe the redemption bill for this year is about $100bn, with some putting the number as high as $150bn.

Taken all together, Renaissance's estimate is that Russia's international reserves will fall only mildly this year from $388bn on January 1 to $345bn by the end of the year, or $43bn – dramatically down from the $124bn the state spent in 2014, according to the investment bank.


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