The ruling United Russia party will retain its parliamentary majority in legislative elections on September 18, benefiting from President Vladimir Putin's high approval ratings, patriotic fervour, and a weakened opposition. This will override dissatisfaction with poor economic conditions in the near term. The main political risk for Putin remains a challenger from within his circle, although he remains the frontrunner ahead of presidential elections in March 2018.
Russia's economy is emerging from prolonged recession in H216 but we forecast growth in 2017 and 2018 to be relatively subdued when considering the scale of the downturn since 2014. Rising oil prices are acting as a short-term boost, but will reduce the urgency to implement badly needed structural reforms, thus maintaining the country's commodity dependence.
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.
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 have upgraded our real GDP growth forecast for 2016 from -1.2% to -0.8%.
We now expect additional rouble appreciation against the US dollar in 2017, forecasting an average exchange rate over the year of RUB58.0/USD.
There is very little 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.
|f = BMI forecast. Source: National Sources/BMI|
|Nominal GDP, USDbn||2,020.3||1,319.4||1,311.8||1,624.3|
|Real GDP growth, % y-o-y||0.7||-3.7||-0.8||1.5|
|Consumer price inflation, % y-o-y, eop||11.4||12.9||6.6||5.5|
|Exchange rate RUB/USD, eop||60.70||72.50||62.00||60.00|
|Budget balance, % of GDP||-0.4||-2.4||-3.5||-2.8|
|Current account balance, % of GDP||2.8||5.2||3.7||3.5|
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