Russia’s economy is likely to contract by 2.1% y/y in 2016

Russia's agricultural sector increased by 2.5%y/y in January and grew by 3% y/y in 2015 on the back of the countries countermeasures regarding food imports strengthening local supply. However, manufacturing contracted to -5.6% in January, while chemical production grew by 3.9% and machinery and equipment production increased by 2.2% y/y, as the economy's weak currency is aiding the local producers.

Despite Russia facing recession for the second consecutive year, the labour data surprised the market on the upside as January unemployment rate came in at 5.8%. The weakness in the economy's currency and labour market dynamics have been aiding the jobs, while real wages have declined with major cut in perks.

"According to our base-case scenario, we expect Russia's economy to shrink by 2.1% y/y in 2016 on the assumption the Brent average price stays at USD31/bl as crude futures were pricing in mid-January 2016 (USD36.7/bl as of 19 February). We expect 2016 GDP to expand if the crude average crosses USD53/bl. We see downside risks to our base-case scenario forecasts if the crude average falls under USD30/bl and the central bank delays policy rate cuts" says Danske Bank in a research note.