Russia: Slower growth but high oil-price gives support

Recent barometer data does not point at a downturn in the near future (graph 1). PMI for December fell back across the board but is still above the levels from mid-2011, above the 50-level (graph 2). We maintain our relatively positive view on Russia in the near term as long as the oil price stays at roughly the level as it is today (graph 3). A high oil price fuels government revenue creating room for fiscal policy, exports and other parts of the economy such as investments and consumption. Our forecast for the oil price is that it will average USD 114 and USD 120 per barrel in 2012 and 2013. Risks are on the downside and heavily connected to the exposure of the Russian economy to prices on commodities and especially oil. Russia could also be affected through the banking system if contagion from the euro zone crises causes a freeze of funding and liquidity in the banking system. We expect GDP to grow by 3.6 per cent in 2012 and 4.1 per cent in 2013, a minor revision to the lower for both years compared to Nordic Outlook November. Daniel Bergvall, Economic Research, +46 8 763 85 94
Key data Percentage change

WEDNESDAY 18 JANUARY 2012

2010 2011 2012 2013 GDP Unemployment* Inflation 4.0 7.5 6.9 4.0 6.7 8.5 -1.0 3.6 6.2 7.0 -2.0 4.1 6.4 6.5 -1.5

Government fiscal balance** -3.5

* Per cent of labour force, ** Per cent of GDP Source: SEB

Economic Insights

SLOWER EXPORT BUT DOMESTIC DEMAND IS FAIRLY RESILIENT GDP-growth in the third quarter 2011 came in at 1.3 per cent q/q (4.8 per cent y/y), stronger than the first half-year average of 0.8 per cent. Manufacturing production shows signs of weakening with a 4.9 per cent increase in November compared to a 7.2 per cent average increase January to October. Exports (measured in USD) grew by roughly 4 per cent per month in October and November on monthly basis and by 25 per cent in annual rate. We expect export growth to slow down somewhat ahead. Investments are pointing higher in the short term and continued improvement of capacity utilisation continues to give support (graph 4). Increased bank lending to corporate supports this even though there is a risk that increased financial turbulence in the euro zone might affect also Russia. Bank lending (graph 5) is increasing predominately in Roubles (up by 30 per cent on an annual basis in October) but during 2011 also loans in foreign currency has also turned positive and rose by over 10 per cent on an annual basis in October 2011. Consumer confidence and retail sales improved during the second half of last year. On an annual basis retail sales increased by 8.6 per cent in November (graph 6). Falling inflation has given a boost to real income, +7.1 per cent in November, and together with a positive development in the labour market, the outlook for household consumption looks stable and we expect consumption together with investments to be a the largest contributors to overall growth going forward. Employment increased by 1.1 per cent in November 2011 and unemployment fell to 6.3 per cent after Octobers 0.4 percentage point increase (graph 7). Unemployment is almost back at pre-crises level and is expected to continue to fall a few more months before increasing somewhat and stay at roughly 6-6.5 per cent this year and next. Inflation is heading in the right direction, down from 9.6 per cent early in 2011 to 6.1 per cent in December (graph 8). Faster than expected decline means that the central bank is in less need of tightening monetary policy for inflation reasons in the short term. Delayed tariff-hikes and base effects give a low price pressure H1 2012. Joining the WTO in mid-2012 will push import tariffs lower over a number of years, creating a mild downward pressure on inflation. Lower inflation has pushed real interest rates into positive territory but they are still at low levels.

Economic Insights

THE ROOM FOR FISCAL POLICY RESPONSE HAS BEEN REDUCED The central bank cut the refinancing rate by 25bp to 8.00 per cent in December (graph 9). This came as a surprise but implications for monetary conditions will probably be small. At the same time the over night deposit rate was raised by 25bp in a possible attempt to reduce capital outflows. Taken together this highlights the present dilemma that the central bank faces; inflation falling/worries about growth means that monetary policy can be eased but could at the same time increase capital flight. Political and economic uncertainty has led to increased capital flight; more than USD 70 billion left the country last year and given the development since the election last December this trend will probably continue. Our main scenario is for the policy rate to stay unchanged next year. The high oil price has made it possible for the government to stimulate demand with expansionary fiscal policy. Overall, the public deficit and debt are low in an international comparison but the increase in federal spending and increased reliance on oil revenue is worrying (graph 10 and 11). The latest additions to increased public expenditure are increased salaries for the military and higher pensions in 2012. We expect no consolidation efforts in the short run, both due to the presidential election in March 2012 and the uncertain international outlook. Instead, if anything, we will probably see increased social spending to boost support for the government before the election. Political risk has risen since the parliamentary election last year and the outlook for the political landscape is clearly less certain than before. It is difficult to say if the development will lead to a more repressive government or if the government will try to accommodate to protests and instead take a more reformist route, back off a bit and try to stabilise the situation. The development both in the short- and longer term also depends on if the opposition is able to unite in their protests and politically. In the short run increased social spending, more or less tolerated protests and an attempt to stabilise the situation with promises of liberalisation seems to be the most probable route until the election. The long (18 years) journey towards WTO membership is coming to an end. Membership negotiations was finalised in November and Russias membership was approved by the WTO on December 16. Russia needs to ratify the deal before mid-June and will then become members 30 days after notifying WTO. Joining the WTO will bring benefits to the Russian economy, but ultimately, the effects will be dependent on the actual will and commitment to implement reforms that improve the functioning of the economy.