Russia Economy in November 2014

Industrial production increased 2.8% in September over the same month one year ago. From 2006 to 2014, IP in Russia averaged 2.5%. Seasonally adjusted, IP increased a solid 1.6% m-o-m, which more than offset the 0.7% decrease in August. September’s rebound was broad-based across industries, with solid growth in both mining and manufacturing. Mining production grew 2.4% y-o-y and manufacturing output expanded 3.6% y-o-y on some recovery in auto production. The ruble’s weakness supported import substitution economic policies in Russia. The food import ban thus added extra positive momentum to the food industry and the beginning of pipeline construction to China may have spurred higher demand for pipes. Output of fruit and vegetable juices jumped by 25%, cheese by 17% and meat (excluding poultry) by 12%.

The Federal State Statistics Service reported a slight increase in the unemployment rate to 4.9% in September from 4.8% in August. Inflation accelerated to 8.03% in September from 7.56% in August, registering its highest reading since August 2011. On a monthly basis, consumer prices increased 0.7%, following a 0.2% rise in August. Market expectations pointed to a further increase in inflation to 8.3%–8.4% in October, driven by food price inflation. The continued ruble devaluation will increase inflationary pressures in the coming months. At the end of October, the Central Bank of Russia hiked its key interest rate by 1.5 percentage points (pp). The interest rate now stands at 9.5%, up from 8.0%. The recent big increase is seen as another attempt to put a floor under the depreciating ruble and help limit capital flight.

The government resumed debt sales in October after cancelling nine auctions in a row since July. In addition, two ruble-bond auctions were cancelled by 21 October as socalled unfavourable market conditions returned as investors sought extra yields on ruble bonds. This brings the total number of cancelled ruble auctions so far this year to 19. A drop in commodity prices in in October, increased pressure on the ruble, leading the central bank to spend more than $13 billion of its foreign reserves to slow the weakening currency. The ruble depreciated 7.7% in October and, since the beginning of the year, nearly 23%. The central bank plans to adopt a ‘free float’ ruble by next year. Currently it allows the currency to fluctuate within a range of 9 rubles. When the ruble weakens past this boundary, the bank spends $350 million to defend it before shifting the band by 5 kopeks. It repeats the process each time the currency falls by 5 kopeks. Due to increasingly subdued medium-term growth prospects, Moody’s ratings agency downgraded the sovereign debt rating of Russia a month ago to Baa2 from Baa1 and kept a negative outlook on the rating. The 2014 GDP forecast remains intact this month at 0.3%, with the sanctions environment remaining a constraint on the GDP growth outlook for 2015, when it is forecast to grow by 0.9% y-o-y. The 2015 figure is prone to high risk – including geopolitical developments – which could push it either way.