President Vladimir Putin's popularity remains near record highs, although we expect this to moderate as economic hardship continues to to be realised by the general public. Despite the deterioration in living standards, we do not expect any mass uprising in response to the deteriorating economy.
Persistently low oil prices, fiscal austerity, weak investment growth and declining real incomes will lead to second consecutive real GDP contraction of 0.7% in 2016, followed by only a modest recovery to 1.5% growth in 2017.
Russia's long-term growth potential is subdued, closer to that of mature developed economies rather than a higher growth emerging market. This is due to the highly centralised nature of the economic model and large government footprint in key sectors, reliance on energy exports, poor business environment, weak investment growth and lack of structural reform momentum.
Russia's external position will remain a bright spot for the economy despite a fall in the price of its main commodity exports, with the current account surplus remaining in relatively robust surplus in the coming years as imports remain subdued. Over the coming quarters we expect little financing pressure to emerge in the economy as its large international reserves position remains sufficient to entirely cover maturing external obligations during 2016/2017.
While Russia's fiscal position is bolstered by very low public debt ratios and fiscal reserves at its disposal, the sovereign profile will deteriorate in the coming years and major fiscal reforms - such as an overhaul of the pension system - will be necessary to ensure long-term sustainability of the public finances in light of lower commodity prices.
Major Forecast Changes
We maintain our real GDP growth forecast for 2016 at 0.5%. Although we have downgraded our forecast for 2017 from 2.3% to 1.5% y-o-y as lower oil prices will prolong a recovery in the Russian economy.
With inflation proving sticky and oil price declines keeping depreciatory pressure on the rouble , we now expect monetary easing to proceed at a slower pace. We have revised up our end-2016 forecast to 9.00%, from 7.00% previously.
With oil price declines at the start of 2016 rendering the government's budget assumptions unrealistic, we have increased our budget deficit forecast from 2.8% to 4.0% of GDP in 2016.
There is virtually no risk of a sovereign credit event occurring in Russia due to high FX reserves and low debt ratios. That said, growth drivers will be elusive in the absence of much higher oil prices or a significant ramp up in structural reform momentum, neither of which looks probable in the coming years. Instead, risks are tilted towards a weaker growth than we currently are forecasting, given the potential for oil prices to undershoot our already below consensus forecasts.
|Real GDP growth, % y-o-y||0.6||-3.7||-0.7||1.5|
|Nominal GDP, USDbn||1,850.7||1,335.6||1,136.8||1,294.6|
|Consumer price inflation, % y-o-y, eop||11.4||12.9||8.5||5.5|
|Exchange rate RUB/USD, eop||60.74||72.85||70.00||73.50|
|Budget balance, % of GDP||-0.5||-2.7||-4.0||-3.4|
|Current account balance, % of GDP||3.2||4.9||4.3||3.6|
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