The Russian Challenge

The Russian Challenge
An Enfeebled Economy
Regional administrations face (in aggregate) a modest
deficit, created in part by their efforts to raise the pay of
state employees along the lines promised by President Putin
in May 2012. Individual regions face particular difficulties,
from which they will be bailed out by soft loans from the
federal budget.
The recent fall in investment has already been mentioned.
One influence on this has been the highest-ever net outflow
of private capital. In 2014 this totalled $154 billion, or close
to 10 per cent of GDP if the latter is converted to dollars at
the end-year ballpark figure of R60=$1. 59
A net private capital outflow has been a feature of the postcommunist
Russian economy in every year except 2006 and
2007. When it is particularly large and accompanied by a
dwindling current-account balance-of-payments surplus,
it threatens the comfortable balance-of-payments position
that has been the norm for Putin’s Russia. Figure 5 depicts
the recent situation.
Figure 5: Russia’s current-account balance and net flows
of private capital, 2005–17 ($bn)
$bn p.a.
150
100
50
0
-50
-100
-150
-200
Balance-of-payments current account
Net private capital flows
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Note: The projections for 2015–17 are those contained in the CBR’s
baseline scenario.
Source: CBR, http://www.cbr.ru/publ/ondkp/on_2015(2016-2017).pdf.
The near future: 2015–16
On 27 November 2014 OPEC decided not to cut crude
oil production quotas. Oil prices fell on the news, and so
did the rouble. This was followed by a fall in forecasts
for the Russian economy in 2015 as the imaginations of
the scenario-makers struggled to keep up with events.
Table 1 presents some key points from the 1 December
projections for 2015 from one official, one independent and
one international forecaster.
Table 1: Selected projections of Russian economic
figures for 2015 based on assumed price of Urals crude
Alfa-Bank a CBR World Bank
Average oil price, $/b 40 60 70
GDP, % change year
on year
-3.8 -4.5 to
-4.7
-1.5
Note: Based on different assumptions about the average annual price in 2015.
a A later Alfa-Bank estimate (email from Natalya Orlova of Alfa-Bank of 17
December) estimates that in the first quarter of 2015 GDP could be down year on
year by 7–10%. When the January and February declines proved to be less than
this, Alfa tweaked its GDP forecast for the year to an overall fall of only 2–3%
(Alfa-Bank ‘Macro Insights’, 19 March 2015).
Sources: Alfa-Bank ‘Russian Economic Spotlight’ of 1 December 2014; CBR
as reported by the US–Russia Business Council (USRBC) Daily Update of 16
December 2014; World Bank World Economic Outlook.
The first two forecasts bear the scars of the collapse in oil
prices and in the currency during the weeks that preceded
their publication. Forecasts of these orders of magnitude
continued to be generated into 2015. Even so, they may not
be durable. The volatility of both key numbers and forecasts
serves as a warning of what is the largest single problem
for the Russian economy in the short term: an unusually
heightened degree of uncertainty. This is considered further
in the next section.
By the end of 2014 at least one thing was clear. The
country faced a recession. An anti-crisis plan was being
prepared, but agreement on it proved difficult. That,
along with the vacillations of the CBR – which raised its
key interest rate to 17 per cent to combat inflation and
capital outflow, and then cut it back unexpectedly to 15
per cent and, from mid-March, to 14 per cent – diminished
the business community’s already low confidence in
policy-making. A degree of consumer hardship looks to be
built into these forecasts: inflation is high and MinEkon
envisages a clear fall in real wages. Whether this hardship
produces anything more than widespread grumbling is
another matter.
It is time to start looking at the problems that underlie the
Russian economy’s weak performance and, apparently, still
weaker prospects.
59
‘TsBR: Ottok kapitala iz Rossii v 2014 vyros v 2.5 raza’ [‘CBR: the capital outflow from Russia in 2014 rose by 2.5 times’], Vedomosti, 16 January 2015.
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