The recent geopolitical tensions between Russia and Ukraine pushed the rouble down by more than 3% in a few days along with the stock market index which lost more than 13%. The board of the Central Bank of Russia held an extraordinary meeting early this month, announcing afterwards an increase in the key interest rate, the one-week repo rate, by 150 basis points to 7%. It also stated that the move was temporary and aimed at containing the risks to inflation and maintaining financial stability after the recent volatility in the financial markets. Furthermore, the Central Bank of Russia intervened heavily in the foreign-exchange market with more than $11 billion. These quick measures helped restore almost half of the ruble’s lost value but proved to be less effective to stimulate confidence in the stock market.
Consumer price inflation increased last month in Russia to 6.1% from 6.0% at the beginning of the year, while industrial production is back into the contraction territory in January. Industrial production decelerated by 0.2% y-o-y, down from fractional growth of 0.4% in the previous month. Retail sales were growing by no more than 4.5% since January 2013, down from double growth in 2012. Nevertheless, retail sales slid to 2.4% y-o-y in February, the worst performance since February 2010. The unemployment rate remained unchanged from December last year at 5.6% in January. The unemployment rate had been fluctuating below 5.6% since April 2013.
The HSBC manufacturing PMI showed a continued deterioration in Russia’s manufacturing sector for the fourth month in a row. The headline figure registered 48.5 last month, up from 48.0 in January. The index stood below 50 points seven times in the past eight months. The manufacturers of investment goods reported a steep output deceleration. The survey indicates the steepest decline in new orders since May 2009.
Furthermore, employment has fallen in February for the eighth month running. The weaker ruble has raised the cost for producers especially on imported raw materials, leading to the fastest pace of increase in average input prices since September 2012. As for the services sector, Russia’s services PMI showed a moderate improvement last month to 50.8, from 50.2 in January. Similar to the manufacturing sector, a weaker ruble generated inflationary pressure in the services sector, whereas outstanding work fell in February. The survey showed, however, a stable trend in job creation after five months of falling employment.
The latest tensions combined with economic uncertainty could only help make the investment climate in Russia worse. Last year, the unattractiveness of Russia’s investment environment had already been instrumental in the ongoing deceleration of economic growth as massive amounts of capital left the country and investment activity slackened. Although it is recognized that the downwards risk to the forecast of 1.9% GDP in 2014 is asymmetrically skewed to the downside, it is left intact this month as developments in the coming weeks will provide further insights on the expected growth trajectory.