The Russian economy and the ruble: main forecasts for 4Q2017 and key budget benchmarks for 201831 August, 2017
Russian GDP turns positive this year after a 2-year recession. Second quarter 2017 GDP results were good and better than the first quarter: GDP year-on-year in the second quarter rose by 2.7% compared with just 0.5% in the previous quarter.
There will be no big GDP boom or rally. The key fact is that without structural or institutional reforms on property rights, or without large social spending, then Russian GDP will fluctuate about 1.7% to a best figure of 2.2% over the next 3-5 years. This presumes the oil price in range of $46 to $55 per barrel.
With the oil price at around $50, then the Russian economy can manage as can western and Russian business. Any price closer to $45 hurts a little while any price closer to $55 has small upside for the rouble and inflation.
The rouble was very strong and is now actually reasonably solid. The only fact is that the Euro has risen against the dollar and therefore against the rouble. The consensus for the rouble over the next 18 months is to remain stable within 2-4 % of current levels presuming the oil price stays close to $50.
Inflation has fallen recently and remains low. Prices popped up a bit in June to 4.4% (from 4.1% in May) due mainly to higher food prices. But they came down again to 3.9% in July. The largest threat to top-line inflation will be the harvest result and spring/early summer weather was poor or volatile. A bad harvest (after the good one last year) could pop prices back temporarily to 5%+ in the late autumn.
Lower inflation helps the Central Bank to reduce interest rates. The Bank decided not to cut interest rates at its last meeting (28 July) due to the imposition of new US sanctions. The Bank wanted to monitor any effects. The Bank’s medium-term aim is to get interest rates down to 6.5% to 6.75% in the next 24 months.
Real wages have been positive for almost one year and finally retail sales turned positive in May 2017. Real wages jumped further by 4.6% in July. However, consumer product companies are not witnessing a stronger business recovery.
A major reason that consumers are still cautious relates to government spending policies and budgets for 2017 to 2019. The years 2015-2017 have seen nominal and real spending cuts of -4% to -8% in government spending. The budget deficits on a rolling scale is falling and the government aims for a deficit this year of - 2.1% from -3.6 last year.
Intercomp Head of Finance Stanislav Skakun notes:
Oil should dependably remain at USD 45-55 per barrel, but it will neither reach higher because of shale production nor should it go lower because the industry is not yet able to produce enough raw materials under USD 40 per barrel.
In addition, a step-up rate from the Federal Reserve System and the expectation of a reduction in the balance of the US financial regulator, which will result in lower dollar liquidity and cooling of commodity market, are putting pressure on oil quotations.
With such oil prices, the ruble should in most scenarios remain at the current exchange rate against the US dollar, with possible gradual increase in the dollar to 70 rubles by the end of 2018.