Before the great recession, Russia was experiencing an average annual GDP growth rate of over 7%. Indeed, thanks to rising oil prices, Russia benefited from increasing terms of trade 1 (chart 1), allowing it, inter alia, to build up its sovereign wealth fund, acquire external assets, improve living standards... However, in the aftermath of the great recession, as soon as oil prices stabilized above $100 per barrel, the Russian economy started to slow down.

In 2014, Russia faced two major headwinds that pushed its economy into a severe recession. First, a broad set of sanctions was launched in response to the deterioration of the situation in Eastern Ukraine and in Crimea. From limitations on the purchasing and selling of financial instruments of major banks, energy and defense companies to a ban on exports of high-technology goods for use in the energy sector, these sanctions contributed to the surge in uncertainty and risk aversion. The collapse of oil prices from more than $100 a barrel to $40 (chart 2) then led to a sharp contraction in export receipts. Coupled with capital outflows, this put the ruble under pressure and forced the Russian authorities to stop defending the exchange rate and move to a floating exchange rate regime. As a result, the ruble fell 50% against the US dollar.

The huge terms-of-trade shock provoked a sharp contraction in domestic demand. While nominal wages were already slowing, the surge in inflation (chart 3) led to a brutal contraction in consumption (chart 4). Loaded with debt issued in dollars, the nonfinancial corporate sector was forced to deleverage and investment also fell.

With low public debt and thanks to its sovereign wealth fund, the government launched a supplementary budgetary plan of 2000 billion ruble over two years (± 3 % of GDP) to provide support to the financial sector and soften the decline of growth. While it succeeded in preventing a full-blown banking crisis, the economy remained under significant strain in 2015 and GDP should fall by close to -4% in 2015. In 2016, the Russian economy is still expected to remain in recession, albeit at a much lower pace of contraction!

Over the medium term, the ability of the Russian economy to grow again at a sustained pace may be questioned, in particular as long as sanctions apply and oil prices remain depressed!

The Macro Team

(1) : Terms-of-trade: ratio between export prices and import prices

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