BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/39
Russia’s economy has shrunk substantially this year, in response to the collapse of oil prices in 2014. The newest BOFIT Forecast for Russia 2015–2017 sees Russian GDP contracting about 4 % this year (assuming the oil price averages slightly less than $55 a barrel). Uncertainty depresses fixed investment, while consumption suffers from the effects of last winter’s inflation flare-up. Government spending falls in real terms. Defying earlier expectations, however, the volume of Russian oil exports has shown robust growth. The volume of imports to Russia has fallen, and is expected to be about 25 % smaller than in 2014.
Even if a moderate rise in the oil price is assumed for 2016–2017, the fallout from the 2014 oil price collapse will continue to weigh on the economy through 2016. Tensions in eastern Ukraine and sanctions, which are not assumed to ease soon, sustain uncertainty. Adding further to uncertainty is lack of clarity about Russia’s use of measures that curtail economic activity and trade. BOFIT expects GDP to still contract 2 % in 2016, along with a slight decline in imports. GDP will increase about 1 % in 2017 and imports will recover gradually. Growth opportunities have been limited, however, by low investment rates and Russia’s systemic deficiencies that have not been addressed.
Revival of imports will be supported by recoveries in the economy and export earnings, as well as the ruble’s real exchange rate, which will appreciate as Russian inflation remains higher than inflation in its main trading partners.
Private consumption should still contract slightly next year as inflation calms slowly and wage rises remain tame. Labour market pressures will be dealt with largely through temporary layoffs and moving workers to part-time status. Export volumes overall will grow slowly as oil sector exports are expected to decline. Investment will fall slightly from uncertainty about the economy and business environment.
Application of monetary stimulus is tricky due to weak desires of firms to make fixed investment. The government, due to lower oil earnings, faces fiscal constraints and thus pressures to cut spending. Restrictive policies to bolster domestic producers have been lifted to the forefront.
There are large risks associated with the forecast. First, the oil price could depart up or down from our assumption. Second, the situation in eastern Ukraine could worsen or also improve. However, the impact of improvements on fixed investment would take longer to materialise than the effects of negative events, which would affect investment rather quickly. The biggest risk to the import forecast comes from possible negative events that would weaken the ruble. Higher government spending could be possible if social pressures rose significantly as elections approach.
BOFIT Forecast for Russia