Russia Economy – November 2012

It is now unlikely that we will see a rebound in the rate of growth of GDP in the Russian economy in 3Q12 and 4Q12, following the economy’s relatively poor performance in 2Q12 that saw it expanding by only by 0.4% on an annualized basis. This corresponds to 4% growth in GDP in 2Q12 y-o-y, which was down on 4.9% growth in 1Q12. Economic expansion in Russia is expected to be even slower in 2013. A tight labour market, a deteriorating foreign trade surplus and weaker agricultural output are responsible for this downgrading of Russia’s economic growth for 2013. Deteriorating private and FDI investment growth are also affecting economic expansion in the country.

Lowering GDP growth in Russia in 2013 in our forecast is in line with different forecasts, including the World Bank forecast that has made substantial downward revisions to its 2012 and 2013 growth forecasts for the country. Manufacturing output grew by 2.9% year-on-year, down from 3.5%. Mining growth eased to 0.5% from 2.0%. Retail and wholesale trade grew by 6.9%, compared with a 9.1% increase in 1Q. Domestic demand has been the mainstay of economic growth this year, as rising real wages and retail loan growth of more than 40% have fuelled growth in household spending.

Economic expansion slowed in July, as consumers began saving more, and investment slowed because of uncertainty about the economic outlook. A deteriorating economic outlook in China, now Russia's largest single trading partner, and the recession in the Euro-zone are affecting the Russian economy. External demand had a significant negative impact on GDP in 2Q and will remain a drag in the coming months. A poor harvest and slower growth in lending will contribute to a slowdown in the second half of the year. The Ministry of Economic Development now expects y-o-y growth to slow to less than 3% in 3Q. This situation poses a difficult dilemma for the Russian Central Bank (RCB). The RCB has kept rates on hold since December. Growth is slowing at a time when inflation looks set to accelerate and there is strong pressure on the bank.

The Asia-Pacific Economic Co-operation (APEC) summit, which was held in Vladivostok in October, underlined Russia's intention to re-orient its economic ties towards the east. Trade with the EU fell to below one-half of Russia's total trade in 2011, from 56% of the total in 2006. Over that period, the share of the Pacific Rim in Russia's trade has increased from 15% to 23%. At the summit, Mr. Putin emphasized that Russia sees Asia "as the most important factor for the successful future of the whole country, as well as the development of Siberia and the Far East." He repeatedly referred to the Chinese president, Hu Jintao, as his friend, and emphasized the importance of trade and energy ties with China (EIU, November 2012).