• We cut our expectation for GDP growth to minus 4% y/y from minus 3% y/y in 2009 on the back of the latest deterioration in economic data, which shows that the economic contraction in Q1 is deeper than we earlier anticipated. Economic indicators suggest that GDP could drop by as much as 7% y/y in Q1.
  • We expect a gradual recovery to emerge in 2010 and we lift our GDP growth expectation for 2010E to 0.5% y/y from 0.0% y/y.
  • We now expect a minor current account surplus of 2.8% of GDP in 2009E compared with our earlier expectation of a 2% deficit. The improved current account outlook comes on the back of a collapse in imports, as households and companies cut spending. We expect imports to drop to USD200bn this year and recover slightly next year.
  • Industrial production is expected to drop 8% y/y for the whole year, and fixed investments to drop 7% y/y on the back of declining demand and tight monetary conditions.
  • We expect overall private consumption to drop 2.5% y/y, as households adjust to declining disposable income in the midst of rising unemployment rates. We expect unemployment rates to rise up to 10.5% by year-end 2009.
  • Fiscal policies will be counter-cyclical as to support the economy. We expect the public budget deficit to be 9% of GDP in 2009, or roughly USD100bn. The deficit will be financed by using public reserves, which currently stand at around USD207bn.
  • We expect net capital outflows could reach USD150bn, and that would create a further drain on FX reserves throughout 2009 and into 2010. However, with a slightly improved outlook for the current account balance we have changed our rouble forecast in a less negative direction – although we are still below forward rates.
  • A key worry for Russia in 2009 is the mounting numbers of bad loans that Russian banks face. In combination with a significantly overvalued rouble, that justifies our expectation for a weaker rouble going forward.
  • The Russian central bank expects to reduce key rates in the coming weeks and months. However, with inflation declining only gradually it will have to tread carefully on this matter. And in reality it is very difficult for the CBR to control day-to-day movements in market rates. We however expect money market rates to drop slightly going forward. But we would not be surprised to see new rate spikes on the way.