Research and analysis

Russia’s Economy at the Start of 2015

Published 13 January 2015

1. Summary

After a difficult 2014, the Russian economy continues to face challenges at the start of 2015. Although the rouble recovered following the currency crisis in December, the fall in the oil price since the start of the year has resumed pressure on the Russian currency as well as the budget. Fitch downgraded its rating for Russian debt on 9 January, and S&P will issue a review imminently. Medvedev’s speech at the Gaidar Forum on 14 January is the next chance for the government to respond to Russia’s challenges, but major announcements are not anticipated.

2. Detail

2.1 The oil price continues to fall, adding to the pressure on the rouble and the budget.

Brent has continued to fall sharply, and hit a six-year low of $48.54/bbl. On 12 January

After falling to 78 to the dollar at the peak of the currency crisis on 16 December, government intervention (and the Kremlin’s order for Russian companies to support the currency) helped the rouble to recover to around 52 to the dollar by 25 December. But as the oil price has continued to fall since the start of this year, the rouble has gradually weakened again. It finished trading on 12 January at around 63 to the dollar.

As the oil price falls further, the pressure on Russia’s budget is also increasing. The 2015 budget is currently based on an oil price of $100/barrel, which means that, in the absence of a rebound, Russia will face a large fiscal gap this year. It is likely to use a mixed approach to deal with this: using reserves to cover part of the gap and making budget cuts to deal with the rest. Russia’s reserves are currently worth around $390 billion, but around $120 billion was spent last year, and many Russian companies and banks are likely to require recapitalisation from these funds in the coming months (VTB, Gazprombank and Russian Agricultural Bank have all received such support in the past month alone). On the other side, spending cuts will increase the pressure on ordinary Russians (inflation came in at 11.4% last year) and further depress GDP.

2.2 Fitch downgrades its sovereign rating for Russia; S&P review due this week.

On Friday 9 January, Fitch Ratings, one of the big-3 international ratings agencies, downgraded its sovereign debt rating for Russia from BBB to BBB-. This puts its Russia rating at the edge of investment-grade status.

Explaining its decision, Fitch noted that “the economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the rouble, coupled with a steep rise in interest rates”. It now forecast that the Russian economy would contract by 4% in 2015 (based on an average oil price of $70/barrel this year), and suggested that “growth may not return until 2017”.

Fitch’s downgrade puts its rating for Russia in line with that of Standard & Poor’s, which downgraded to BBB- on 25 April last year. S&P is currently reviewing this rating, and is expected to announce the results imminently.

2.3 PM Medvedev to speak at Gaidar Forum.

The new political year will be kicked off by a speech from Prime Minister Medvedev at the Gaidar Forum on Wednesday 14 January

3. Disclaimer

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