Russia Seeks to Reassure Over Brexit Volatility

File Photo of British Parliament Building, Big Ben, Thames, adapted from image at loc.gov

(Voice of America – voanews.com – Daniel Schearf – June 29, 2016)

As Britain and Europe struggle to come to terms with the British vote in favor of leaving the European Union, financial markets are roiling across the globe, including in Russia.

Even before the vote for a British EU exit, the head of Russia’s largest bank, Sberbank, warned that the country’s economic recovery would be at risk and stocks would plunge by as much as 10 percent.

Russia’s markets and currency, the ruble, took an initial hit as a result of investor uncertainty and a dip in the price of oil.

Still, a market rally and assurances by Russian officials have led most analysts to conclude that the outlook for the economy is positive, at least in the short term.

The long-term outlook, however, is less certain.

Impact of Brexit on Russia

Sberbank CIB Senior Economist Anton Stroutchenevski said Brexit’s impact on Russia’s economy will be very limited and probably negligible.

“On the back of increased geopolitical tensions in 2014-16, the capital inflow into Russia dried out,” he told VOA in e-mailed comments. “This slowed the economic development of the country but paradoxically increased the immunity against the global volatility at the financial markets.”

The sanctions against the West imposed on Russia in 2014 for its aggression in Ukraine cut its financial institutions off from international lending. That, along with the drop in oil prices, pushed Russia into recession.

Critics like Vladimir Milov, a former Russian deputy minister of energy who now heads the Democratic Choice political party, say the potential economic effect of Brexit on Russia’s shrinking economy could be serious.

“Russia is pretty much still dependent on foreign debt,” he told VOA. “And, we’re also very much dependent on inflow of investments. We’re very much dependent on consumer imports. So, basically, people who argue that Russia’s become somewhat detached and protected from [the] Western economic world, they clearly overstate this issue because dependence is still quite high. And, a new wave of economic shocks caused by the ‘real Brexit,’ if it happens, might deliver a lot of trouble.”

Some officials and financial analysts argue volatility in Europe will encourage investment in Russia’s emerging market as a safer alternative.

Milov disagrees and notes global economic turbulence usually leads investors to secure assets like U.S. treasuries and away from emerging markets

“And, Russia has been obviously performing far worse than most of the emerging markets. So, by this outflow of investment, Russia would possibly be hit the hardest,” he said.

Credit rating agency Fitch Ratings on Wednesday said the recession in Russia is easing and it expects a return to growth by the end of the year.

“Higher oil prices are supporting the fiscal position, but there remains uncertainty over possible spending ahead of the legislative elections in September and over the medium-term fiscal plan, which will be unveiled after the polls,” it said in a report released in London titled “Emerging Europe Sovereign Credit Overview.”

The oil factor

Sberbank’s Stroutchenevski said Russia’s economy could still be negatively affected by Brexit if it lowers the price of oil, Russia’s biggest export and the source of half the government’s budget.

“Obviously the decline in oil price will mean the ruble depreciation, increased budget deficit and inflation acceleration,” he said.

But Stroutchenevski added that Russia’s economy, measured by Gross Domestic Product (GDP), is demonstrating increasing sustainability against oil price volatility.

“In fact, after seasonal and calendar adjustment, the quarterly GDP has been remaining effectively unchanged since 2Q15 [the second quarter of 2015],” he said. “Thus we observe the period when the oil price dropped by more than 50 percent and the economy demonstrated this amazing resistance. However, the oil price inflation in February-June by almost 80 percent did not stimulate the upturn of the economy. Therefore the decline in oil price will not affect significantly the dynamics of real GDP.”

But many analysts say Russia’s failure to wean itself off an oil-and-gas export dependency leaves the economy fundamentally unbalanced and vulnerable.

“It’s always an interesting case to argue with an optimist,” Milov said. “But they have been proven wrong so many times before in the case of [the] Russian economic situation. So, I think you should really look at the fundamentals. And, they’re not good for the Russian economy.”

Russia’s central bank chief, Elvira Nabiullina, on Tuesday said there was no big negative impact on Russia from Britain’s vote to leave the EU and that the bank has the tools to handle any high volatility on the Russian market. But she acknowledged any long-term consequences would depend on the precise terms of Brexit.

Article also appeared at voanews.com/content/russia-seeks-to-reassure-over-brexit-volatility/3397128.html

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