2017: From adaptation to growth
Yaroslav Lissovolik
The Eurasian Development Bank’s chief economist
The past year of 2016 can be described as a year of the Russian economy adaptation to low oil prices after the extremely volatile 2015. Last year the exchange rate of the rouble stabilised significantly and capital outflow reduced: the net capital outflow in the private sector decreased several times compared to over US $50 billion in 2015. All these factors have also helped to slow down inflation to a record low of 5.4% after more than 15% in mid-2016.
Russia’s economic growth will most probably remain positive in 2017 and will be fostered by several factors. In the first place, a softer monetary policy on the part of the central bank will help to support lending activities. In addition, stabilised oil prices and reduced capital outflow in 2016-2017 can provide more opportunities for the reinstatement of investments. If oil prices stand at US $55-60 per barrel, GDP growth can reach 1.5%, but if they return to US $45-50 per barrel it will be weaker, yet positive, at 0.3-0.5%.
Insignificant economic growth would hardly help to ensure a considerable increase in consumer expenditure and real income of the population. The main positive factors for the population’s income this year will be the appreciation of the rouble, lower inflation, and the use of additional budget revenues to finance social expenses. Overall, in 2017 Russia’s GDP can be expected to turn positive, inflation to reduce to at least 5%, and the rouble to strengthen because of further reductions in capital outflow compared to several recent years. The beginning of the year, which was marked by the rouble breaking the threshold of RUB 60 per dollar, may result in that the seasonal pattern when the rouble appreciated in the first six months, as it happened in several recent years, will be repeated.
If oil prices reach US $60 per barrel and positive trends in capital flows are maintained, the rouble may appreciate to RUB 55 per dollar over the first half of the year.
In 2017, the main macroeconomic challenge for Russia may be the depletion of its reserve fund. At least, this is the base scenario envisioned by the Ministry of Finance in the 2017 budget. If budget imbalances persist, more sources to finance budget gaps will be required. Arrangements with the OPEC countries, which also experience budget difficulties, were aimed at, among other things, alleviating oil exporters’ budget problems. In 2017 the focus will be on these countries’ capability to comply with their quotas and commitments. Discipline has historically been a challenge for the OPEC countries.
Another key factor for the Russian economy will be the monetary policy of the Federal Reserve System. Its tougher rhetoric and plans to raise the key rate by up to three times over 2017 expose developing markets to the risk that high volatility will return. In these conditions, the Russian central bank will be cautious about decreasing its key interest rate. It is possible that it will be decreased by 1.0-1.5 percentage points in 2017, which approximates the reduction in 2016.
So, what will be the economic development scenario in 2017? Will it be like in the post-crisis 2010 when the 4% growth was perceived by many as a bitter disappointment compared to the breakthrough growth rates in the post-crisis 1999? Or will the current year continue the pattern of 2015-2016 when, despite the predicted fast economic recovery, Russia’s GDP continued to dive under the influence of unfavourable external factors? The positive beginning of the year in financial markets (as distinct from several past years) gives hope for somewhat of a transitional scenario where growth won’t exceed 1% and will remain extremely vulnerable to external shocks.