Macro Stability Returning in Russia

Executive Summary

Economic growth strengthened in Russia in Q1, rising to 1.3 percent year over year from the 0.9 percent pace seen to end 2017. Real GDP growth has been positive on a year-over-year basis for more than a year now, one of many signs that macroeconomic stability is returning to Russia. Consumer price inflation is down to a multi-decade low after skyrocketing a few years ago, and the central bank is in rate-cutting mode as pressure on the ruble has eased. Rising oil prices and a current account surplus also provide an encouraging near-term backdrop amid some emerging market volatility elsewhere in the world.

That said, the long-run prospects for the Russian economy remain relatively dim. The working-age population is contracting, and slow growth in foreign direct investment (FDI) and gross fixed capital formation are not supportive of sustained capital deepening and accelerating labor productivity. With geopolitical tensions still elevated and sanctions continuing to weigh on the investment backdrop in Russia, we do not expect the Russian economy to return to the supercharged growth rates of the past anytime soon.

Real GDP Growth Strengthens in Q1

Preliminary data that were released today showed that real GDP in Russia rose 1.3 percent year over year, a bit below the Bloomberg consensus forecast of 1.5 percent. A breakdown into demandor supply-side components is not available at this time, but the sharp slowdown in inflation has helped boost real income growth in Russia (Figure 2). When the GDP details are released next month, we may see that real consumption growth was lifted by improved purchasing power among Russian consumers.

Some semblance of macroeconomic stability appears to have finally returned in Russia. Real GDP growth started slowing in 2012, eventually turning into outright contraction as international sanctions and the plunge in oil prices led to a nosedive in the value of the Russian ruble (Figure 3). Inflation spiked (Figure 4), eroding consumers’ purchasing power and leading the Central Bank of the Russian Federation to sharply raise interest rates to stabilize inflation expectations and attract capital inflows. This toxic combination of destabilizing factors has since faded: oil prices have reversed, the ruble has generally stabilized, inflation is at multi-year lows and the central bank is cutting rates.

In addition to these tailwinds, some structural factors underlying the Russian economy look relatively healthy. Russia’s current account is in surplus, in contrast to some other emerging market economies that have faced macro challenges recently. The country also has a $367 billion war chest of foreign exchange reserves that can be used to combat financial instability, and the external debtto-GDP ratio in Russia is relatively low at roughly 30 percent (it exceeded 40 percent leading up to the 1998 debt default).

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