russia economic overview

Macroeconomic performance

The Russian economy has been adversely affected by the global crisis through a number of channels. First, the economy has been exposed to a sharp terms-of-trade shock as the price of Urals brand oil plummeted from US$ 138 per barrel (pb) in July 2008 to an average of around US$ 44 pb in the first four months of 2009 before recovering to US$ 65 to US$ 70 pb in June. Prices of ore, metals and steel also fell sharply from their mid-2008 levels. Second, in August 2008 Russia experienced a large scale capital outflow as well as a withdrawal of deposits from the banking system, in particular from medium-sized and regional banks. These events prompted the central bank to inject large amounts of liquidity into the banking sector and to permit a gradual depreciation of the rouble by about 25 per cent against the dollar-euro basket. The stock market also lost around three-quarters of its capitalisation before bouncing back somewhat by mid-2009. The availability of trade finance and micro, small and medium-sized enterprises (MSMEs) credit has been sharply reduced, and the syndications markets have been shut for all but a few major borrowers.

Lastly, weaker domestic and external demand and tight credit conditions have had a marked impact on the real sector. In the first half of 2009 industrial production declined by 15 per cent year on year, with the steepest declines in the automotive and construction-related sectors. Large corporates have been forced to scale down, postpone or cancel large modernisation projects, including those with important energy efficiency components. In the first and second quarters of 2009 output contracted by 9.8 and 10.9 per cent, respectively, year on year.

The government adopted a comprehensive fiscal stimulus package in April 2009, backed by its large fiscal reserves. The package centres on social transfers (unemployment benefits, retraining programmes, pensions, transfers to subnational governments primarily responsible for education, health and housing), as well as support for selected companies in single-industry towns. The budget deficit is expected to be less than 9 per cent of GDP in 2009, declining to around 7 per cent in 2010. In order to establish a market benchmark should the downturn prove to be longer than expected and external financing subsequently needed, a eurobond issue is being considered and a roadshow planned for late in 2009.

Outlook and risks

The stimulus provided by the fiscal package and liquidity injections into the banking system are expected to arrest the sharp fall in output observed in early 2009, with the economy returning to growth in late 2009 or 2010, supported by a combination of higher commodity prices, fiscal stimulus and a gradual recovery of external demand. However, the economy remains highly dependent on oil and gas export receipts, and the main risk is of a further decline in commodity prices which could delay recovery and put pressure on the rouble and the financial system.