Fri | Dec 9, 2016

Russia warns of recession next year

Published:Wednesday | December 3, 2014 | 12:00 AM
People walk past a display with currency exchange rates in central of Moscow, Russia, on Monday. Russia's ruble hit a new all-time low on Monday, dropping more than three per cent as declining oil prices and the conflict in eastern Ukraine weigh on the economy. - AP

The Russian government has acknowledged that the country will fall into recession next year, battered by the combination of Western sanctions and a plunge in the price of its oil exports.

The news caused the stock market to drop and pushed the ruble to a fresh record low against the dollar.

The economic development ministry on Tuesday revised its GDP forecast for 2015 from growth of 1.2 per cent to a drop of 0.8 per cent. Russian households are expected to take a hit, with disposable income seen declining by 2.8 per cent against the previously expected 0.4 per cent growth.

Russia's economic outlook is at the mercy of the global market for oil, a key export that finances the bulk of the state budget. Sanctions over Moscow's role in eastern Ukraine are making things worse, hurting Russian banks and investment sentiment in particular.

The national currency, the ruble, has dropped by more than 40 per cent this year as the economic troubles mounted. That, in turn, risks spawning more problems, such as a spike in inflation that would pinch consumers.

Little Impact on America

While Russia's troubles could do some economic damage to Europe, they are unlikely to have much impact on the United States (US) economy, the world's largest. Russia is the 28th-biggest market for the US, absorbing US$11.1 billion worth of US goods last year.

"Russia-US trade is hardly large," said Eric Lascelles, chief economist at RBC Global Asset Management. "I don't think we should be worried" about the impact of a Russian recession on US exports.

In fact, the US is benefiting from the lower oil prices that are driving Russia towards recession, and the money being pulled out of Russia is being pumped into US and European financial markets, helping to keep interest rates low, Lascelles said.

Mark Zandi, chief economist at Moody's Analytics, agreed, saying: "I don't think there's any direct economic impact" on the United States.

However, he noted that Russian President Vladimir Putin could respond to the economic troubles by trying to divert the Russian public's attention with even more belligerent policies towards Ukraine and the West, raising tensions and perhaps rattling financial markets.

The release of the forecast on Tuesday afternoon weighed on the Russian stock market and the ruble, which fell 5.4 per cent lower against the dollar, to a new all-time low of 53.97 per dollar.

Finance Minister Anton Siluanov attempted to talk up the ruble, arguing that the new forecast for Russia's economy is too gloomy. He told the Russian news agency it is only "an early estimate and it is still being discussed".

Siluanov said the ruble is oversold and its current exchange rate would correlate to the oil price of US$60 per barrel. The global price of oil, Brent, traded around US$70 a barrel on Tuesday.

Russia's economic stability is important for the region. It is a major trading partner for Western Europe, selling raw materials and oil and gas to the West and importing consumer goods and foodstuff.

European agricultural producers reported big losses following the Kremlin's ban on some imports. A weaker economy and a weaker ruble would also mean that fewer Russians will be travelling abroad and spending their money there.

Russia's public finances may withstand some short-term turmoil - the government has a solid balance sheet, extremely low sovereign debt and sizable reserves in foreign currencies. The economy could also improve if oil prices rebound. But the broader uncertainty over the economy created by the market volatility and sanctions is likely to weigh on the outlook.

"The real damage from the collapsing ruble and oil price is to investment and growth," Chris Weafer, senior partner at Moscow-based Macro-Advisory, said in a note to investors.

"Russia is a non-investible country for all but the bravest of hedge fund investors right now, and will remain in this category until both the ruble and oil stabilise at minimum."

- AP