Russian Federation: signs of stabilization?

Since the end of 2014, the Russian economy has been facing major headwinds. The  drop in oil prices (Chart 1) has led to a significant fall in exports as well as government revenues and the weaker Ruble has fuelled a surge in inflation (Chart 2). As a result, domestic demand has been contracting fast… while exports have barely benefited from the currency depreciation (Chart 3).

A few weeks ago, the IMF and the Bank of Russia downgraded further the Russian economic outlook for 2016: they respectively revised GDP growth from -0.6% to -1.8% and from ‑0.75 % to -1.4 %. Still, despite these dire forecasts, the recent stabilization in oil prices and in the Ruble exchange rate could well pave the way for some improvements in the second half of the year.

Inflation in particular has clearly fallen, from 17% last year to close to 7% in April, and should continue to slow in the coming months. As a result, real wages have nearly stabilized, and this should benefit consumption (chart 4), all the more so since employment has not suffered as much as during the 2008-09 crisis. As far as firms are concerned, industrial production is recovering and the capacity utilization rate is rising. This should favor some pick-up in investment. Indeed, according to the Bank of Russia’s bank lending survey, banks expect an increase in new loans in the coming quarters.

With two major headwinds abating, the Russian economy should emerge from the doldrums. Still, unless oil prices rebound well above $50, it would be vain to expect a quick recovery.