Russia has managed to sustain its economic growth, albeit at a slightly lower rate than expected. GDP grew by slightly more than 4% on a y-o-y basis. Domestic demand remains resilient and the country has obtained World Trade Organization membership after 19 years of negotiations, it is expected that private consumption to strengthen further considering lower tariffs on imports. This will lower tariffs on imports and will push the economy to become more competitive. Foreign direct investment is also expected to increase. Inflation in August rose to 5.9% from 5.6% in July as global crop losses caused a substantial increase in the cost of grain.
Concerns about inflation led the Russian Central Bank (RCB) to increase the benchmark interest rate by 25 basis points to 8.25% in mid-September, its first rate increase in 16 months. While growth remains a key consideration, the tightening of monetary policy is a clear signal of the transition to inflation targeting (Consensus Forecasts, 17 September 2012). Industrial production rose 0.9% m-o-m in July after remaining flat in June. The construction industry, however, contracted by 3.2% on annual basis, while gross fixed investment rose by 3.8% in June. In the early months of the year, high oil prices underpinned a resumption of the underlying trend of a real appreciation of the ruble.
The real effective exchange rate appreciates by around 4% in the 1Q (EIU, August 2012). However, in the 2Q, Russia experienced a weakening of its currency as the markets reacted to global uncertainty, capital flight from risk and a decline in oil prices. According to preliminary data, Russia continued to run large current account and trade surpluses in the 1H12. High oil prices are the main reason behind Russia’s sustained current account surplus, although exports of other raw materials and basic manufacturing also contributed to its current account surplus.
High oil prices caused a surplus in the 1H12. Fiscal policy for 2013-15 will be based on a new fiscal rule, which limits budgetary spending in line with movements in oil prices. The new rule allows planned spending to rise by 5% in 2013. This rule would not decrease dependence of the government budget on the country’s oil revenues in the short-run, as it is expected that the non-oil deficit will shrink to only 10% in 2014 from 11.3% in 2011. Monetary policy, on the other hand, has been more prudent as the RCB has left the key refinancing interest rate unchanged at 8% in its latest meeting in July.
Rising inflationary expectations have been the main reason for keeping interest rates on hold over the last six months. After higher than expected inflation in June and the increase in utilities tariffs in early July, the RCB is expected to wait for a clear indication of inflation before its possible changes to monetary policy. There is an official commitment to move towards a floating exchange rate with the RCB intervention confined to preventing excessive currency volatility (EIU, September 2012).