Russia: the worst is behind us...

In recent years, the Russian economy has faced two very different types of shocks: first, a major decline in its terms of trade[1] due to falling oil prices, and second, economic and financial sanctions. As a result, it has seen a steep downturn in economic activity (chart 1). According to recent indicators, however, with the help of stabilised oil prices, the Russian economy is back on the growth track for 2017. 

Given the long-term impacts of these two shocks (the sanctions initiated mid-2014 were extended until January 2017, and the recent increase in tensions leaves little hope that they will be lifted any time soon), the Russian authorities were wise to allow the rouble to depreciate significantly. True, the resulting explosion in inflation has caused consumption to contract considerably. However, this strategy has left the foreign exchange reserves available to the central bank virtually intact. More importantly, it has helped absorb the cost of the oil price decline for the budget (translated into roubles, budget revenues from oil have fallen much less than in USD!). Finally, the combination of the rouble’s depreciation and financial sanctions has driven Russian companies to reduce their external debt. Consequently, the Russian economy has absorbed much of these twin shocks and is now in a good position to benefit from the recent stabilisation (and potential increase) of oil prices (chart 2). 

Recent economic indicators are pointing in this direction: the composite PMI hit 52.6 in September, manufacturing output accelerated (chart 3) and consumer sentiment improved. Inflation, which stood at nearly 16% a year ago, fell below 7% in August, allowing the central bank to relax its monetary policy somewhat. Ultimately, the Russian economy is making its way out of the recession: with oil at around $50/barrel, GDP is expected to climb by 1.7% in 2017. Even stronger growth is possible with an agreement on production quotas between OPEC members and Russia. 

In the medium term, however, the Russian economy's capacity for sustainable growth of more than 1.5% is limited. The ageing of the population (chart 4), lack of diversification outside the use of natural resources, and re-balancing of public finances are all obstacles that will be difficult to overcome...