The Russian economy in the 2Q 2015 Reviewed by Momizat on . [caption id="attachment_5459" align="alignnone" width="615"] Russia`s economy contracted by 4.6 percent in the second quarter compared to the same period last y [caption id="attachment_5459" align="alignnone" width="615"] Russia`s economy contracted by 4.6 percent in the second quarter compared to the same period last y Rating: 0

The Russian economy in the 2Q 2015

Russia`s economy contracted by 4.6 percent in the second quarter compared to the same period last year and more than double the 2.2 percent contraction recorded in the previous quarter, which is the largest drop in six years.

Russia`s economy contracted by 4.6 percent in the second quarter compared to the same period last year and more than double the 2.2 percent contraction recorded in the previous quarter, which is the largest drop in six years.

By Chris Weston, CEE Consulting Group

Russian economy contracted by 4.6 percent in the second quarter compared to the same period last year and more than double the 2.2 percent contraction recorded in the previous quarter, which is the largest drop in six years and were viewed as worse than expected, according to estimates provided by the Federal Statistics Office on August 10.

It remains possible that the percentage decline may yet be revised upwards: retail sales fell by 9.4 percent in June, reflecting the real squeeze in consumers` incomes. The industrial sector, which had registered a flat line in the first quarter, fell by almost 5 percent – thus the expected rise in output which might normally be expected by a sharp fall in the RUR to prompt more import substitution has instead created an effect more akin to a “dead cat`s bounce”.

The recent further fall in the oil price has also fed into a lower rouble. While the Russian currency recovered from its dramatic fall up to Christmas 2014, downward pressure on oil prices has led to the USD buying RUR 64, compared with just RUR 50 in the Spring.

This currency drop will play out in a number of ways – none of these conducive to the overall good of the economy:

  • Inflation already exacerbated by the Russian sanctions on EU food imports is further likely to increase as the RUR depreciation leads to increased prices of imports.
  • To counter further destabilising falls in the RUR, interest rates will still remain at relatively elevated levels of 11 percent. These are rates 10 times greater than in the USA, UK and the Eurozone.
  • Such high interest rates are unlikely to lead to investment, which has been subdued for multiple reasons – the overall poor economic climate,  sanctions, poor environment (vide Bashneft Oil affair and its expropriation in December 2014), and general dearth of “animal spirits” with instead high levels of capital spirited out of the country.

On the positive side, natural resource companies, such as Gazprom, Rosneft and Novatek might see some gain in depreciation of the currency as a lower RUR rate generates a higher level of RUR sales when converted from, say, USD, but this is being impacted by lower output (as per Gazprom), more competition and falling oil and gas prices. This vicious cycle – lower oil prices matched by falling RUR, will continue to play out for some time yet.

A further vicious cycle has yet to play itself out but it remains in the form of a looming banking crisis. Banks will typically allow for problems in one sector and for a certain proportion of clients, either persons or firms, to be unable to be classified as bad debt or nonperforming loans. But when a recession arises, all sectors are at risk and chain reactions become the unhappy norm: one big company falls leading to knock on effects all round and a ripple effect throughout the wider economy. This further restricts investment, a key factor for Russia to modernise. Big firms want bailouts and banks, as has been noted in Europe; the size of banks` balance sheets can easily dwarf the Gross Domestic Products of the countries involved.

The banking sector can thus be the weakest link in the chain around which much depends.  Russia`s banking sector with more than 800 institutions might appear to observers as competitive when compared to some countries, but  it is also a cause for major concern given the recession will place significant pressures on them all. Russia`s economy may yet not have reached the bottom of its trough.

Photo courtesy of Open Clip Art Library (Wikimedia Commons).

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