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Economy Falling oil prices coupled with Western sanctions are taking their toll on Russia’s economic sector
Officials Predict Recession in 2015 DAVID MILLER SPECIAL TO RBTH
Economists within the Russian government and the World Bank predict that Russia will enter recession in 2015, as historic declines in the price of oil and stubbornly persistent inflation usher in the first contraction since 2009. The Russian economy has taken a beating in recent months as oil, the country’s main export and the source of roughly half of the government’s tax income, slid to five-year lows. Meanwhile, inflation reached 9.1 percent in November compared to a year earlier as a drop in the nation’s currency, the ruble, pushed up the price Russians must pay for imported goods. The nation’s economy will probably shrink about 0.8 percent in 2015, deputy economy minister AlexeiVedev said in early December, citing a ministry forecast. The ministry had previously predicted growth of about 1.2 percent next year. “Most macroeconomic indicators for the economy will worsen through the next three quarters and will look a whole lot worse by the time we get to next summer,”wrote Chris Weafer, a senior partner at the Moscow-based Macro Advisory and a long-time observer of Russia’s economy, in a note posted on the firm’s Web site. “Where there can be more of a debate is about whether there will be meaningful recovery from next autumn.”
barrel or less, the Finance Ministry estimates, according to a statement posted on the ministry’s website by the director of the long-term strategic planning department, Maxim Oreshkin, on Dec. 2. Crude oil sank below $70 per barrel in early December for the first time since 2010 as the Organization of Petroleum Exporting Countries decided not to reduce output, and shale-oil production in the U.S. continued to rise. Oil prices continued to fall throughout the month. Russia, currently the world’s biggest energy exporter, is pumping crude at near-record levels of more than 10 million barrels a day. Oil and natural gas accounted for 68 percent of Russia’s total exports in 2013, according to the U.S. Energy Information Agency.
Rising prices Inflation may reach 9.8 percent year-on-year in 2014 and peak at “double-digit growth”in the first
IN FIGURES
quarter of 2015, Moscow-based brokerage UralSib predicted. Inflation will spike following the sharp decline of the ruble “because normally prices grow for 3–4 months after an exchange rate shock,” UralSib analysts Alexei Devyatov and Olga Sterina wrote in a note to investors on Dec. 5. The ruble has lost more than a third of its value against the dollar this year, shrinking Russians’ purchasing power. But the falling ruble has also relieved some of the pain of lower oil prices, giving Russian energy firms and the government extra rubles for every dollar’s worth of foreign oil sales.
Searching for growth GETTY IMAGES/FOTOBANK
Russia is expected to enter a recession next year for the first time since the global financial crisis in 2009 as the ruble and oil prices continue to fall.
The course of the ruble against the dollar since January
9.1%
was the inflation rate in Russia in November, as the falling ruble pushed up the price Russians must pay for imported goods.
0.8%
is how much Russia’s Finance Ministry expects the economy to contract in 2015, but only if oil prices average $80 a barrel.
Oil and recession
$59
NATALIA MIKHAYLENKO
Russia’s Finance Ministry said it tentatively supported the forecast for a 0.8 percent decline in 2015 — but only on the assumption that oil prices average about $80 a barrel. The contraction may accelerate to 3.5 percent or 4 percent if the price of oil averages $60 a
was the price of crude oil on Dec. 12, and the price was expected to continue to fall.
In a feisty state-of-the-nation speech on Dec. 4, Putin acknowledged the challenges facing the economy, and offered a raft of measures in response. He pledged to reduce intrusive government inspections on small businesses, establish two-year tax holidays for new small businesses and initiate a full amnesty for Russians who return capital to the country from abroad. “The period ahead will be complex and difficult,”Putin said.“We must escape the trap of zero-level growth and achieve an aboveaverage global growth rate within the next three to four years.” Putin charged officials to work to deter currency speculators from driving down the ruble. “I’d like to ask the Bank of Russia and the government to carry out tough and concerted actions to discourage the so-called speculators from playing on fluctuations of the Russian currency,” Putin said.“The authorities know who these speculators are. We have the proper instruments of influence, and the time is ripe to use them.” However, Putin also noted that a weaker ruble would also help make Russian goods more competitive, and called on Russian producers to use the opportunity to seize market share from foreign competitors over the next few years.
Consumerism According to public surveys, residents of Russia are now allocating most of their income to food purchases
Russians remain attached to the ruble even as the weakening currency forces them to limit discretionary spending and spend more on essential items. ALEXEI LOSSAN RBTH
The fall of the ruble is leading to a reduction of the population’s purchasing power, according to the Russian Ministry of Economic Development. In the last two months the ruble has lost almost 50 percent of its value against the U.S. dollar. As a result, according to the ministry, the number of people living in poverty will reach a four-year high of 11.7 percent in 2014. “With the weakening of the ruble, many people are trying to protect themselves from the devaluation of the currency by buying rather expensive durable goods, especially if they have no Russian equivalents,”said Alexei Kozlov, chief analyst at investment company UFS.“Thus we are witnessing a growth of purchasing activity.” However, according to Kozlov, this spending pattern is a temporary phenomenon, and the weakening of the ruble has a whole range of more lasting neg-
ative consequences, such as the growth of inflation, the contraction of the consumer market and an increase in the credit rate, which can lead to the deceleration of economic growth. Surveys show that Russians are already spending most of their money on food and limiting their travel to within the country.
Despite the fall of the ruble, the population prefers to keep its savings in the local currency. Feeling the pain “The consumer sector is under a lot of pressure and the standard of living is decreasing,”said Finam Management analyst Maxim Klyagin. “Consumers have reduced their spending on capital purchases, such as apartments, cars, and also on nonessential goods and services.” According to the Russian Federal State Statistics Service (Rosstat), results from the first half of 2014 show that the yearon-year dynamics of retail sales overall have fallen from 3.9 to 2.7 percent.The retail sector has post-
ed limited, but steady, growth since 2009. Delays on credit payments have also gone up in recent months. According to data published by the Central Bank on Dec. 3, as of Nov. 1, the share of 90-day delays on credit payments reached 7.9 percent. The last time a similar indicator was registered was Feb. 1, 2011. The bank’s official announcement says that the growth in arrears is a result of the deterioration of the population’s financial situation. The most likely reasons for defaults are delays in salary payment, a decrease in income and the loss of a job. Most Russians hold loans in rubles, so the decreasing currency shouldn’t be a contributing factor. According to Fitch Ratings, at the end of September, only 17 percent of all bank credits were in foreign currencies and almost all were corporate accounts.
Falling ruble, growing fears? Despite the fall of the ruble, Russians still prefer to keep their savings in the national currency. According to a survey conducted by the All-Russian Center of Public Opinion (VTsIOM), 53 percent of Russians are worried about the
IN THEIR OWN WORDS
Maxim Klyagin INVESTMENT ADVISOR, ANALYST FINAM MANAGEMENT
"
The consumer sector is under a lot of pressure and the standard of living is decreasing. Consumers have reduced their spending on capital purchases, such as apartments, cars, but also on nonessential goods and services.”
Alexei Kozlov CHIEF ANALYST AT UFS INVESTMENT COMPANY
"
With the weakening of the ruble many people are trying to protect themselves from the devaluation of the currency by buying rather expensive durable goods, especially if they are expensive and have no Russian equivalents. Thus we are witnessing a growth of purchasing activity, which won’t last long however.”
© VLADIMIR ASTAPKOVICH / RIA NOVOSTI
Russians Spending More on Food and Durable Goods
Analytics from VTB Capital show that the amount Russians spend on food will increase in the near future from 31 to 40 percent.
weakening of the ruble. However, only seven percent of Russians have exchanged rubles for foreign currencies in the last two months. Dmitry Bedenkov, director of the analytical department at Russ-Invest, said that “trust in the national currency is an important element in the investment process, which stabilizes the economy and guarantees a normal production cycle and the functioning of market mechanisms.”
Changes in spending According to a study from the Levada Center, 80 percent of Russians said that prices in the country are growing while the standard of living is falling.Those who participated in the study named the fall of oil prices as the main reason for the problems in the
economy (45 percent), followed by Western sanctions against Russia (33 percent) and the annexation of Crimea (30 percent). Romir, the largest private independent research firm in Russia, recently released a study showing that the share of respondents who are restricting their purchases has increased from 8 to 20 percent. Moreover, one out of three households is being forced to re-allocate budget funds to food and essential items. Analytics from the bank VTB Capital show that the amount Russians spend on food is likely to rise from 31 to 40 percent. Meanwhile, according to data from the Federal Tourism Agency, the number of Russians choosing to spend their vacations within the country due to the sanctions and the fall of the ruble has already increased by 30 percent.
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