Primary navigation:

QFINANCE Quick Links
QFINANCE Topics
QFINANCE Reference
Add the QFINANCE search widget to your website

Home > Blogs > Shaun Richards > What can we expect next from the economy of Russia?

What can we expect next from the economy of Russia?

What can we expect next from the economy of Russia? Shaun Richards

Facebook LinkedIn Twitter

So far, 2014 has seen Russia dominate much of the news agenda. The Winter Olympics at Sochi was followed by the annexation of the Crimea and all sorts of interventions in Ukraine. Just over a week ago, one of the consequences of this was the very sad story of the shooting down of Malaysian Airlines flight MH17. Even before all of this, there had been concerns about the prospects for the Russian economy. Such thoughts are only likely to be reinforced by the fact that western nations are in the process of tightening economic sanctions against Russia. An already weak economic situation looks as though it is about to be given another downwards push.

Economic growth

The numbers for the first quarter of 2014 showed that the economy was 0.9% larger than it had been a year before. But a different reality is shown by this from the World Bank:

"Russia’s Q1 growth estimate indicates a 0.35 percent contraction of economic activity on a seasonally adjusted quarterly basis."

This continued a downwards progression for economic growth in Russia evident in 2013 too. The main driver has been falls in the growth rate of domestic demand, particularly consumption. Also I note that one of the quirks of Gross Domestic Product (GDP) statistics is at play here. The numbers were boosted by net trade but whilst there was a rise in exports there was a larger fall in imports. It is hard to explain to someone how  importing less makes them better off!

What about the currency?

2014 opened with the Rouble declining in value and talk of currency flight from Russia being all the rage. In March, it had fallen such that 51 Roubles were required to buy a single Euro as opposed to the around 40 as 2013 opened. This had inflationary consequences which I will discuss in a moment. However, since March, the Rouble has regained some of the lost ground and is now at 47 Roubles to the Euro. Thus the currency flight that European Central Bank (ECB) President Mario Draghi referred too on 8 May must have calmed considerably:

"We had very significant outflows that have been estimated by some to be in the order of 160 billion euro out of Russia."

What about inflation and interest-rates?

After noting the currency decline, it will not come as too much of a surprise that Russia is suffering from an episode of inflation. The annual rate of consumer price inflation rose to 7.8% in June which is a considerable amount above its official target of 5%. Accordingly, it should not be too much of a surprise to learn that so far in 2014 the Bank of Russia has raised its official interest rate from 5% to 8% with the latest move coming this morning. So monetary policy is avowedly contractionary and very different to that of the Euro area which has moved into the world of zero and negative interest rates.

Looking ahead

The central bank has reduced its economic growth forecasts for 2014 as shown below:

"Against this background, the Bank of Russia lowered its GDP growth forecast for 2014 from 1.5–1.8% to 0.4%."

The private-sector purchasing managers indices from Markit show an economy which is struggling:

"Russian private sector output stabilized in June, having previously declined four times in the first five months of 2014 [...] Although services new business stopped contracting in June, the 12-month outlook for activity in the sector remained weak."

Comment

Whilst the economy of Russia has shown some signs of economic weakness in 2014, you may reasonably be thinking that considering the circumstances it could easily be worse. A reason for this is the Catch-22 Russia, and those considering economic sanctions on it, face which is highlighted by this from the US Energy Information Authority:

"Russia is a major exporter of crude oil, petroleum products, and natural gas. Sales of these fuels accounted for 68% of Russia's total export revenues in 2013, based on data from Russia's Federal Customs Service."

Accordingly if we wish to speculate about the economic future of Russia as major a factor as any is the oil price. That is the ultimate price of being a commodity based economy. To that we can add the contractionary nature of an official interest-rate of 8%.


Facebook LinkedIn Twitter

  • Bookmark and Share
  • Mail to a friend

Comments

or register to post your comments.

  1. ShaunRichards says:
    Sun Aug 24 17:29:15 BST 2014

    Hi Raytzz I agree that the situation looks grim for the Russian economy right now. In addition to the western sanctions being applied the food sanctions of President Putin will also affect ordinary Russians. The amount of trade with Ukraine must have been reduced. Plus the oil price has drifted lower to around US $102 per barrel of Brent Crude Oil. The only good news must come from companies will military contracts.
  2. raytzz says:
    Tue Jul 29 22:11:05 BST 2014

    Business and investing in the Russian economy has just been derailed. President Obama and the European Union just slapped Russia with sanctions on its banks an other important imports. Tomorrow morning Russians citizens will try to use their credit cards and find that they have been rendered useless. I think it is safe to say that Vladimir Putin's popularity and confidence is on a very slippery slope.

Report abuse

If you feel a comment is inappropriate and should be reviewed or moderated by the site administrator, please detail your reasons using this form.

Back to QFINANCE Blogs

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • RSS
  • Bookmark and Share

Blog Contributors