Russian economy likely to flatten in Q3 and return to growth in Q4; Brexit effect appears to be limited

Policy makers in Russia had reacted to the terms of trade shock in 2014-15 by shifting to a fully floating exchange rate regime, a material fiscal tightening and an emergency rate hike. Therefore, macro adjustment in Russia currently is quite advanced as compared with certain other commodity exporters and the economy has neared the stage of stabilization.

The effect of Brexit also appears to have remained quite limited when comparing Russia to its peers in CEEMEA. A moderate adverse effect through the trade channel is likely, while the financial channel is subdued because of external deleveraging that took place since imposing of sanctions, noted Morgan Stanley in a research report.

“As external conditions improve, we revise our growth projections upward to -0.6 percent Y in 2016 and 1.4 percent Y in 2017 versus -2.1 percent Y and 0.9 percent Y before”, added Morgan Stanley.

Improved oil price outlook is the main reason for the upward revision. A USD 43 per barrel average Urals oil price in 2016 is expected and USD 50 per barrel in 2017.

The high frequency data still indicates towards the economy shrinking in the second quarter of 2016. The Russian economy is likely to flatten on sequential basis in the third quarter and turn positive in the fourth quarter, stated Morgan Stanley.

Meanwhile, subdued domestic demand, recovery of the Russian ruble and tight monetary policy eased inflation pressures in the Russian economy. In March, inflation decelerated to 7.3 percent, faster than anticipated. The Bank of Russia preferred to err on the side of caution and maintain the key rate on hold at 11 percent until June, said Morgan Stanley. An improved oil outlook and RUB appreciation has improved the inflation outlook.

“We expect inflation to average 7.2 percent Y in 2016, slowing down to 6.1 percent Y by the end of the year, and 5.5 percent Y in 2017, slowing down to 5.4 percent Y by the end of the year”, said Morgan Stanley.

In spite of the prudent monetary policy, additional deceleration of inflation would become difficult in 2017.