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Russia Economy in May 2014

Source: OPEC 6/4/2014, Location: Asia

Standard & Poor’s cut Russia’s credit rating last month following the $64 billion capital outflow in 1Q14. The rating agency lowered Russia’s sovereign debt rating to BBB-, the lowest investment grade that is just above junk status. Moreover, the new rating indicates a negative outlook as the tense geopolitical situation could lead to further money outflows of domestic and foreign capital. Last month, the central bank raised the interest rate for the second consecutive month. The key rate increased by 50 basis points to 7.5%. This move was aimed at taming the inflationary pressures from currency depreciation and lending support to the currency. Inflation jumped in April to 7.3%, from 6.9% in March. This marks the first breach to the 7.0% inflation rate since May 2013 and would put a limiting factor on the country’s household consumption. Retail sales were on an upward trend during February and March, growing by 4.0% y-o-y in March, from 3.9% y-o-y in February. Still, however, the growth in retail sales is less than the March 2013 figure of 4.5% and remained fluctuating under the 5.0% growth level since November 2012.

The unemployment rate posted 5.4% in March, notably lower than the same month of last year when it registered 5.7%. Industrial production increased at a slower rate of 1.4% in March, down from a 2.1% increase in the previous month. The Russian manufacturing sector continued to contract in April with the HSBC manufacturing PMI posting 48.5 last month, slightly up from 48.3 in March. This extends the downturn in the country’s goods-producing sector to a sixth successive month. All the main variables — output, new orders, exports, employment, backlogs and purchasing — continued to decline last month. In the meantime, the survey showed that inflationary pressures remained sharp, heavily linked to the weakening rouble exchange rate. Input price inflation eased slightly, but output price inflation hit a three-year high.

Economic and political uncertainty has caused a capital outflow from Russia in 1Q14 at an estimated record level. The recent overall trend in economic indicators remains unpromising this month combined with the ongoing geopolitical uncertainty in the region. Pressured currency and rising inflation could dampen consumer spending. Our forecast for Russia’s GDP growth in 2014 is slightly reduced this month to 0.9%. It should be noted, however, that any forecast related to the 2014 GDP growth of Russia should have a wide range of risk due to the uncertainty over the path that the geopolitical developments might take.

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