Should Russia fear US recession? – Nordea Markets

As the US Treasuries curve is getting increasingly flat, there is more talk about the turning point in the US cycle and the history suggests that Russian economy may face recession if the US downturn is large enough to cause a significant oil price drop, according to analysts at Nordea Markets.

Key Quotes

“While the US economy is experiencing one of the longest expansions on record, Russia has already faced one more recession (2015-2016) since the global crisis of 2008-2009 and is just gradually recovering. The talk of the global economic slowdown is becoming louder. We still believe that the current upswing probably has at least two to three years left and a recession in the Euro area may not arrive until 2021 or even later. Will the Russian economy be hit in case of this slowdown?”

“The co-movement of Russian and US economic cycles deserves some attention.”

“The data in the sample suggests that rather than being hurt by the waves of whatever crisis originating in the US, the Russian economy slides into recessions only if the US downturn causes oil prices to tumble.”

“The impact became pronounced when the US recession caused the oil market to collapse. The fall on the oil market started in Q3 2008 and intensified sharply in Q4 2008, the quarter when the Russian economy entered the recession. Out of three recessions in the modern Russian history, only one coincided with a recession in the US.”

“The experience of the three latest economic crises in Russia shows that an oil price fall of 25% or more is capable of causing a recession. Although the number of observations available for the analysis is very small, we presume that the next US recession will spread to the Russian economy only if it’s strong enough to translate into significant pressure on the oil market (by significant we mean a fall of at least 25%).”

“It seems that for a US recession to cause oil prices to fall by around 25% the US economy should probably drop by more than 1.5%.”

“To sum up, if history is a guide, the Russian economy is not bound to enter a recession when the US economic cycle turns the next time. For that to happen, the US recession should be strong enough to cause oil prices to drop significantly. The impact on the Russian economy might be felt in up to one year after the start of a US recession. Thus, from a global outlook perspective, the Russian economy is still likely to grow until 2021.”

“The government, which is currently launching an ambitious reform agenda, should bear this timing in mind and proceed quickly to long-awaited structural reforms before a need to implement anti-crisis measures arises.”