Russia Economy in September 2014

Source: OPEC 9/27/2014, Location: Asia

Preliminary data from the country’s Federal Statistics Service showed that Russia had a disappointing GDP growth in the 2Q of only 0.8% y-o-y compared to 0.9% in the 1Q. GDP growth has been slowing since the 1Q12 when it advanced 4.9%. Last month, Russia’s Economic Ministry downgraded its forecast for 2014 GDP by half to 0.5% from 1.0% a month earlier. The Ministry also halved its 2015 figure from 2.0% to 1.0%. Unfavourable market conditions led Russia to cancel its seventh ruble-denominated bond auction in a row last month (its fifteenth auction this year). Geopolitical tensions caused the government’s borrowing costs to climb this year hovering above 9.8%, some more than 180 basis points above the Central Bank’s key interest rate. Russia has raised RUB124 billion this year from selling the domestic bonds, though the initial plan was to raise RUB808 billion in 2014. Energy exports revenue and a depreciated ruble are seen as seen as giving the government a decent source of local currency to keep side-stepping higher borrowing costs.

The manufacturing sector showed signs of slow expansion last month with the manufacturing PMI unchanged from the previous month at 51.0. The survey highlighted the fastest growth in new orders this year, though it remains muted, while output rose for the third month running, also at weaker rate. The rise in output is attributed to local demand as new export orders have been decreasing for the past 12 months. The sector could benefit from the import substitution policy which the government has made a priority. However, this might lead to faster inflation in prices which will eventually impact private consumption. Indeed, the survey showed that input price inflation accelerated for the first time since March as shortages were reported alongside a weaker ruble. Firms continued to cut staff in August, albeit at the slowest pace in the current 14-month period of job shedding. The services sector expanded moderately in August, with business rising to 50.3 from 49.7 in July. This improvement followed five straight months of decline.

The Russian ruble depreciated 1.6% against the US dollar at the end of August compared to end of July. A weaker ruble helps exporters when most of their revenue is in foreign currencies, while their costs are in rubles. However, a weaker ruble has resulted in notably higher inflation of more than 7.0% in the four months to July. Inflation accelerated further to 7.5% in July. The Central Bank’s inflation target is 5% for 2014 and 4.5% for 2015. Aiming at tempering inflation, the Central Bank continued its tightening policy in July, raising the benchmark interest rate by 50 basis points to 8%. Retail sales barely increased in July by 1.1% y-o-y, its second slowest rate since December 2009. The unemployment rate in Russia remained unchanged at 4.9% in July of 2014 from the previous month.

Economic growth over the first half of this year exhibited an obvious trend to the downside. Last month, some encouraging signs emerged from the manufacturing and services sectors. Yet these muted improvements do not provide a solid ground for a better economic outlook. Continued geopolitical uncertainty is increasingly limiting the prospects for economic growth, amid currency depreciation, high inflation and poor growth in retail sales. The expected second round of EU economic sanctions would make faster GDP growth even less likely. The forecast this month for Russia’s 2014 GDP growth is revised down to 0.3% from 0.5%, while 2015 is now anticipated to see 1.1% growth, down from the previous forecast’s 1.2%.


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