Russia: The worst seems over - Commerzbank

After a drop of 3.7% in 2015 the Russian economy will shrink by some 0.5% this year expects Analyst, Lutz Karpowitz at Commerzbank as a low oil price and sanctions imposed by the US and EU are taking its tolls.

Key Quotes

“However, some kind of economic stabilization cannot be overseen. In fact the negative growth rate in 2016 will mainly be the result of statistical base effects. After all, the real economy expanded 0.6% qoq in Q3 on a seasonally adjusted basis.”

“The import substitution and localization program is dampening the negative effects coming from the sanctions induced by the US and EU authorities. International corporates are more and more looking for ways to label their products “made in Russia” which opens the way for participation in public tendering. While helping short term the substitution program is likely to lower efficiency in the long term.”

“Overall we expect real GDP to expand some 1 1/4% in 2017 and 2% in 2018. This is not much for Russia but at least stabilization.”

“Inflation is coming down

Recent inflation data surprised on the downside. The central bank target of 4% for the end of 2017 seems still ambitious but not completely out of the world. We expect inflation to bottom out around 6% in 2017 and 2018. With a key of currently 10% this opens scope for rate cuts. However the central bank is acting very cautious as Trumps election creates a more negative background for emerging markets in general. Cutting rates too early contains the risk of RUB depreciation.”

“So far the RUB did not come under any pressure due to Russia surplus in the current account balance. Therefore Russia will hardly come into any financing problems regarding its external balances. If the situation on the FX market turns out to be stable cautious rate cuts might result. However this is not our base line scenario.”

“For the Russian economy and for the rouble the oil price is still decisive. However, we do not expect any more pressure from this side as Saudi Arabia can hardly survive with a lower oil price. In 2015 Riyad was identified as one of the main drivers behind the plummeting oil price in its efforts to hit the US fracking industry. At least this risk has faded.”

“Against the background of a stable economy but still above average inflation we expect a mild depreciation of rouble against the USD towards 75 at the end of 2018.”