Russia’s economy preparing for takeoff

The Russian economy continues to decline on an annual basis, falling 3.7% y/y in October and over January-October 2015, versus -4.1% y/y in Q3 15, as a continued weak oil price, the lagging effects of aggressive monetary policy, high inflation, increased capital costs and falling investment in the challenging geopolitical situation all weigh on the main macro indicators.

However, the supply-side indicators touched the bottom in Q3 15 and the path of contraction is slowing. Seasonally adjusted data shows the economy grew 0.1% m/m in October, while the positive seasonally adjusted dynamics have been uninterrupted over the past four months.

Monthly basis data signals that economic turmoil is settling down and the economy is preparing for a take-off that economists expect to be Lshaped rather than a V-shaped, on further oil weakness and expectations of too-cautious monetary easing while inflation risks prevail.

"We have raised our 2015 GDP forecast to -3.9% y/y, from the -6.2% y/y we released in May 2015, as economic contraction caused mainly by the oil price crash and aggressive monetary policy (rather than the effect of sanctions) is turning out to be more limited than expected due to the introduction of the free float regime and the start of import substitution", says Danske Bank.

"We keep our 2016 GDP growth forecast unchanged at +0.5% y/y, as we expect the Brent price to recover 7% to USD59/bl in 2016 seeing downside risks for our forecast on extra slow monetary easing. We expect 2017 GDP to expand 1.8% y/y on a lagging rate cut effect leading to recovery in fixed investments and the continuing strengthening of industrial production. However, oil price volatility, the geopolitical environment and the CBR's interventions remain sources of economic insecurity", added Danske Bank.