EBRD sees Russia’s GDP contracting by 4.5% in 2015

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(Business New Europe – bne.eu – May 14, 2015)

The European Bank for Reconstruction and Development (EBRD) expects deep
recession in Russia to have a larger-than-expected negative spill-over
effect on countries with strong ties with its economy, the bank says in its
latest Regional Economic Prospects report published on May 14.

Russia’s GDP is seen contracting by 4.5% in 2015, with the recession easing
to 1.8% decline in 2016, attributed to oil prices stabilising at $60 per
barrel and prudent macroeconomic management. But GDP will remain affected
by unsolved deep-rooted structural issues and economic sanctions.

This is much less optimistic then the official forecast of 3% GDP decline
in 2015 by the Ministry of Economic Development, which recently argued the
recession would not last until the fourth quarter of 2015. In its latest
outlook, the European Commission expected Russia’s GDP to contract by 3.5%
in 2015, with some stabilisation to follow in 2016 with 0.2% economic
growth.

Despite the deepening recession, Russia is seen by the EBRD as having
significant reserves to mitigate it. While retail sales and incomes have
been in decline, pressure on the ruble has subsided because of the
recovering oil price. The country’s current account is also in surplus due
to shrinking imports.

While capital outflows continue, the decline of Russia’s international
reserves evened out after losing 30% to about $353bn by end-April. Fiscal
policy is set to loosen, having a widening 3.7% of GDP deficit in 2015.

Economic policy of the Russian authorities is balancing several objectives,
in the bank’s view: preventing a large drop in international reserves
through a flexible exchange rate, allowing a cautious fiscal easing without
risking remaining fiscal buffers, and supporting key banking sector players
in the face of the worsening balance sheets.

Despite the large depreciation of the real exchange rate, a stated policy
goal of import substitution has proved challenging. Agriculture is
suffering and industrial production has failed to pick up the slack of
declining imports. Recent strengthening of the ruble and fast adjustment of
ruble prices may discourage investment in import substitution projects,
although real wage drops could support its profitability, the EBRD
believes.

The swift stabilisation of the ruble to RUB50 to the US dollar as of the
end of April is driven by several factors identified in the bank’s report.
As well as increased oil prices, stabilisation of the geopolitical crisis
has significantly reduced Russia’s risk premiums, with the spread of credit
default swaps almost halving to 350bp; the decision of Russia’s central
bank to extend $30bn in Fx repos to banks helped them to deal with foreign
debt repayment, and the stabilisation of the ruble prompted households and
corporations to reconvert some of the Fx purchases made in December.

Financing conditions will remain tight, however, as indicated by weak
syndicated lending. “The market is basically closed,” reads the EBRD
report. At the same time, the Russian Ministry of Finance began considering
a Eurobond placement in 2015, given the recent decline in yields on
sovereign bonds.

The EBRD finds it hard to see a rebound in the Russian economy going
forward without the reversal of its ongoing de-coupling from the rest of
the world, and the introduction of major structural reforms. The economy
may therefore face a protracted period of slow growth and stagnation.

Overall, the bank notes, the positive sign for the whole region is that
risks related to the Ukraine crisis appear to have been contained at a
higher level, with the February ‘Minsk 2’ peace accords so far generally
holding. The situation is still seen as volatile, with EU and US sanctions
against Russia remaining in place.