Russia’s Central Bank estimated net capital outflows at $25.8 billion in 2Q14. This is five times more than outflows during 2Q13. It follows $48.8 billion which exited the economy in 1Q14. For the third time this year, Russia’s Central Bank raised the interest rate late last month to 8.0% from 7.5%. According to the Central Bank, the decision aimed at slowing the CPI to a 4% target in the medium-term. This is also seen as a move to support the Russian rouble following new US financial sanctions. Annual consumer inflation declined to 7.5% in July 2014 from 7.8% in the previous month, driven mostly by the lower cost of electricity, gas and other fuels. After new EU sanctions blocked Russia’s biggest banks from the bond markets, the rouble depreciated 6.25% against the US dollar by the end of July from the end of August, while Russia’s stock market price index lost more than 10% over the same period.
The manufacturing sector showed notable signs of improvement in July with its PMI in the expansion territory for the first time since October 2013. The index was supported by higher production and new orders. While new export orders contracted at the fastest pace since April 2009, job creation in the sector continued to decline. The PMI inflation index improved last month and eased to its 2H13 trend which should be reflected in softened inflation in Russia in the coming months. Retail sales growth decelerated in June to its lowest since December 2009. It increased by just 0.7% y-o-y, down from 2.1% a month earlier. In June of 2014, Russia’s unemployment rate was recorded at 4.9%, unchanged from the previous month. A year earlier, unemployment was recorded at 5.4%. The number of unemployed people decreased slightly to 3.68 million in June from 3.7 million in May. Unemployment fell 9.8% y-o-y.
Geopolitical tensions had already impacted the Russian economy even before the latest financial sanctions by the US and the EU. It remains to be seen whether and how this new round of sanctions will affect the economy, especially as market sources estimate that $74 billion in debt will be coming due over the next 12 months, of which $41 billion has been borrowed by non-financial Russian state companies (the rest by state banks). Early signs suggest that Asian banks are a possible alternative, especially in Hong Kong and Singapore. Public investment might be sacrificed for the sake of aiding targeted state banks and big enterprises, as well as taming inflation. With the GDP falling almost 18% q-o-q in 1Q14, the risk of recession is mounting alongside the weakening currency, rising inflation, continuing capital outflows and slower lending growth. However, Russia’s substantial foreign exchange reserves, as well as its healthy fiscal position, low unemployment rate and substantial revenues from oil and gas exports provide the country with reasonable means to manage the economy. Russia’s GDP forecast remains intact this month at 0.5% and 1.2% for 2014 and 2015, respectively.