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

Russia's has started 2016 on a weak note despite the low base effect and lower interest rates (the current key rate is 11% versus 17% in January 2015). Output indicators continue to shrink, with weaker oil prices and increased global volatility putting pressure.

Industrial production continued to fall (-2.7% y/y versus -4.5% y/y a month earlier), partly mitigated by higher utilities output (+2.5% y/y) due to the cold weather. The demand side remains weak on account of poor purchasing power and low consumer confidence despite slowing inflation (9.8% y/y in January 2016 versus 15.0% y/y in January 2015). Real wages shrank by 6.1%, which was less than expected but is still weighing on retail sales, which saw a softer fall due to the base effect.

"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." said Nordea Bank in a research note.