The Russian economy started 2012 on a positive note. Yet Russia is no more immune to the influences of the global economy than the other BRIC nations, and may be even more vulnerable. With Europe in crisis, China slowing, and oil prices declining, it is likely that growth in 2012 will be significantly slower than in 2011.
After real GDP grew 4.3 percent in 2011, first-quarter GDP was up 4.9 percent from a year earlier. This was the result of strong consumer spending and elevated oil prices. Then, in the second quarter, things started to change. First, Europe’s recession deepened, negatively affecting export revenue for Russia. Second, China’s economy slowed, which also had a negative impact on exports—especially given that China is Russia’s largest export market after the European Union. Third, the price of oil dropped substantially, also reducing export revenue. Fourth, the crisis in Europe contributed to a renewed flight to safety among global investors, which included capital flight from Russia. This had an adverse effect on business investment. Indeed, business investment as a share of GDP in Russia is low relative to most emerging markets. Failure to invest not only reduces current growth; it also has a negative impact on future growth.
Some positive factors contribute to the outlook for Russia: Consumer spending has remained reasonably robust, the result of strong real-wage gains, tax incentives, strong growth of consumer credit, and pent-up demand. Retail sales have been particularly strong.
In addition, inflation lately has been surprisingly low. In April, consumer prices were up only 3.6 percent from a year earlier—a post-Soviet record low. This increase helps to boost real wages. It also provides the central bank with some wiggle room to loosen monetary policy without worrying about inflation. On the other hand, inflation was temporarily suppressed by some price controls. As these are removed, it is widely expected that inflation will rebound.
Finally, the recent high price of oil enabled the government to run a deficit much smaller than anticipated. This provided the government with room to engage in a modest degree of stimulus through increased spending. Indeed, the government intends to boost investment in public infrastructure—partly as a way to offset the deceleration in private-sector investment. On the other hand, the recent drop in the price of oil means that the role of fiscal policy in boosting growth could be coming to an end.
There are many factors that will retard growth in the coming year. Naturally the troubles in Europe and the slowdown in China are top of mind, as is the drop in the price of oil. The impact on the industrial sector has been considerable. In April, industrial production was only 1.3 percent higher than a year earlier, having decelerated substantially from 2011. In addition, investment remains weak due to political uncertainty, worries about the Eurozone situation, and capital flight. The latter has been driven by the global flight to safety as well as by political uncertainty within Russia. Not only does capital flight influence the level of investment, it also has the effect of depressing the value of the ruble. While the ruble was riding high during the period of rising oil prices, lately it has come under pressure. This in turn will stymie the ability of the central bank to ease monetary policy further. After all, the central bank might feel compelled to intervene in currency markets in order to stabilize the ruble.
Perhaps the biggest risk to Russia comes from the Eurozone situation. To determine the vulnerability of Russia’s financial system to Europe, the central bank recently conducted stress tests on Russia’s top banks, analyzing the impact of GDP growth of 2 percent and a 15–20 percent decline in the price of oil. The central bank concluded that such a scenario would lead banks to lose roughly one-quarter of their capital. This suggests that a more severe drop in economic growth and the price of oil could have a devastating impact on the health of Russia’s financial system.