The Dawn of a New Economic Era? Russia Economic Report April 2015 Edition No. 33
Main messages 1 Russia s economy experienced two shocks in 2014, but avoided a recession A steep drop in oil prices, geopolitical tensions with sanctions shocked an economy already impacted by lingering structural problems. The economy was successfully stabilized. The shocks hit the economy late in the year. Growth was 0.6 percent. Weaker Ruble and trade restrictions revived manufacturing activity. 2 Growth prospects for 2015-2016 are negative The full effects of the two shocks will become evident in 2015 and likely push the Russian economy into recession. The World Bank baseline scenario projects a contraction of 3.8 percent in 2015 and a contraction of 0.3 percent in 2016. Two alternative scenarios with a lower- and upper-bound oil price. 3 Achievements in shared prosperity are under threat The World Bank baseline outlook sees the poverty rate increasing from 10.8 percent in 2013 to 14.2 percent in 2015 and in 2016. This would be the first significant increase since the 1998-1999 crisis due to declining income and consumption and high inflation. 4 The impact of sanctions is likely to linger for a long time New realities will have the potential to alter the structure of the economy and the ways Russia integrates with the rest of the world. Strategic policies needed to balance old and new risks to the economy: (1) manage adjustment to the lower oil price and sanctions; (2) lessen structural growth constraints.
Russia Economic Report No. 33 1. Recent Economic Developments 2. Outlook and Risks 3. The Economic Impact of Sanctions
Recent Economic Developments: A Year of Economic Turmoil
The Tale of Two Shocks: Oil Prices and Impact of Economic Sanctions Oil Prices and Ruble Exchange Rate in 2014 120 30 110 100 90 80 70 60 50 40 35 40 45 50 55 60 65 70 Oil price Rub/USD (right hand axis)
High Inflation and Declining Real Wages Dampen Consumption Russia s CPI inflation by components and Real wage growth, percent, y-o-y 18 15 16 14 10 12 10 5 8 0 6 4-5 2 0-10 2011 2012 2013 2014 2015 Food Non-Food Services CPI 2009 2010 2011 2012 2013 2014 Nonmarket Nontradables Tradables Total
Russia s Economy Avoided A Recession 15 Growth composition, percent, y-o-y 5-5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-15 Consumption Change in inventories Import GDP growth Gross Fixed Capital Formation Export Stat error
Monetary Tightening and High External Borrowing Cost Extinguish Investment Central Banks Key Policy Rate (percent) and Russia s CDS spreads (bps) for 5 year bonds 18 16 14 12 10 8 6 4 640 540 440 340 240 140
Tradable Sector Becomes Main Growth Engine Contribution to GDP Growth By Sector, y-o-y, percent of GDP 5.0 0.2 3.0 1.0-1.0 5.0 0.0-2.7 2.8 2.2 1.3 1.8 0.0-0.2 0.1 2.9 0.3 1.0 0.5 0.3 0.4 0.0-0.1-3.0-5.0-3.6-7.0-0.4 2008 2009 2010 2011 2012 2013 2014 Tradable Non-tradable Public sector
World Bank Outlook for Russia: A Protracted Recession
Global Growth Moderately Rising Global real GDP growth, percent, y-o-y 2009 2010 2011 2012 2013 2014e 2015f 2016f 2017f World -1.8 4.3 3.1 2.4 2.5 2.6 2.9 3.2 3.2 High income -3.5 3.0 1.9 1.4 1.4 1.7 2.1 2.4 2.2 Developing countries 3.0 7.8 6.3 4.7 5.0 4.5 4.5 5.1 5.3 Euro area -4.5 2.0 1.7-0.7-0.4 0.9 1.4 1.7 1.6 Russia -7.8 4.5 4.3 3.4 1.3 0.6-3.8-0.3 2.2
Russia s Outlook Depends on Oil Prices mb/d, year over year growth 4.00 Growth in Global Oil Demand 3.00 2.00 Non-OECD, ex China 1.00 - (1.00) China OECD (2.00) (3.00) (4.00) 2007Q1 2008Q3 2010Q1 2011Q3 2013Q1 2014Q3
Russia s Growth Outlook is Negative GDP growth, percent, y-o-y 3 3.4 2 1 0 1.3 0.6 0.1-0.3-1 -2-3 -2.9-3.8-1.0-4 -5-4.6 2012 2013 2014 2015 2016 Lower-bound scenario Baseline scenario Upper-bound scenario
Real GDP Levels Fall Below 2012 Real GDP, percent, 2012=100 102 101 100 99 98 97 100.0 101.3 101.9 99.0 99.1 98.0 97.7 97.2 96 96.2 95 2011 2012 2013 2014 2015 Lower-bound scenario Baseline scenario Upper-bound scenario
Shared Prosperity Achievements At Risk Poverty and Shared Prosperity 16 15.7 0.424 15 15.2 14.8 0.422 14 14.2 14.2 0.420 13 12 13.3 13.0 12.5 12.7 12.7 12.6 0.418 0.416 0.414 11 10 11.2 10.7 10.8 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0.412 0.410 Poverty rate, % Lower-bound scenario Gini (rhs) Baseline scenario Upper-bound scenario
100 Is the Middle Class Still Growing? Share of the Population with Per Capita Income in US$ ppp / day 50 0 more than 50 USD/day 25-50 USD/day 10-25 USD/day 5-10 USD/day less than 5 USD/day more than 10 USD/day
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Percent 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Russia s Investment and Productivity Challenge Gross capital formation, percent of GDP, and Total factor productivity growth 35 30 25 20 15 10 5 15 0 10 5 0 Russia BRICS Average (excluding Russia) EU11 Average Resource Rich* Average -5-10 -15 Total Factor Productivity Capital Labor GDP Growth
How Will Russia Manage the Adjustment to Lower Oil Prices and Sanctions? Assure technology and innovation transfer, e.g. technology that can support exploration of less accessible oil and gas fields. Counterbalance restricted access to external finance, e.g. effectively invest natural resource revenues. Boost investor and consumer confidence, e.g. careful management of financial sector risks and fiscal buffers.
Special Focus Note The Economic Impact of Sanctions
The Economic Impact of Sanctions on Russia Stock market prices and trends and Exchange rate dynamics, Euro-Dollar basket 1900 1800 1700 1600 1500 1400 1300 1200 110 90 70 50 30 10 35 40 45 50 55 60 65 70 75 Trade volume, bln Rub (right axis) MICEX index 80
The Economic Impact of Sanctions on Russia Bond Issuance in US$ billion and Russia Corporate Emerging Market Bond Index for Russia 25 320 20 300 15 280 10 260 5 240 0 H1 2013 H1 2014 H2 2013 H2 2014 220
The Economic Impact of Sanctions on Russia Russia s Food and Beverage Imports by Country: Q3, 2013 and 2014 (US$ billion) and Russia s Cereal Imports by Country: Q3, 2013 and 2014 (US$ billion) 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 0.25 0.2 0.15 0.1 0.05 0 Q3/2013 Q3/2014 Q3/2013 Q3/2014
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EXTRA SLIDES
Baseline Scenario Projections Main economic indicators 2012 2013 2014 2015 2016 Oil price (US$ per barrel, WB average) 105.0 104.0 97.6 53.2 56.9 GDP growth, percent 3.4 1.3 0.6-3.8-0.3 Consumption growth, percent 6.4 3.9 1.5-5.3-1.9 Gross capital formation growth, percent 3.0-6.6-5.7-15.3 1.1 General government balance, percent of GDP 0.4-1.3-1.2-3.6-3.1 Current account (US$ billions) 71.3 34.1 56.7 73.7 62.9 percent of GDP 3.6 1.6 3.0 6.0 4.4 Capital and financial account (US$ billions) -32.3-56.2-143.2-122.1-60.0 percent of GDP -1.6-3.0-7.7-10.0-4.2 CPI inflation (average) 5.1 6.8 7.7 16.5 8.0
Upper-bound Oil Price Scenario Main economic indicators 2012 2013 2014 2015 2016 Oil price (US$ per barrel, WB average) 105.0 104.0 97.6 65.5 68.7 GDP growth, percent 3.4 1.3 0.6-2.9 0.1 Consumption growth, percent 7.0 3.5 0.9-3.0-0.6 Gross capital formation growth, percent 1.5-5.6-8.2-10.8 1.8 General government balance, percent of GDP 0.4-1.3-1.2-2.8-2.1 Current account (US$ billions) 71.3 34.1 56.7 61.7 54.0 percent of GDP 3.6 1.6 3.0 4.5 3.5 Capital and financial account (US$ billions) -32.3-62.2-143.2-105.5-48.6 percent of GDP -1.6-3.0-7.6-7.7-3.1 CPI inflation (average) 5.1 6.8 7.7 14.0 7.0
Lower-bound Oil Price Scenario Main economic indicators 2012 2013 2014 2015 2016 Oil price (US$ per barrel, WB average) 105.0 104.0 97.6 45.0 50.0 GDP growth, percent 3.4 1.3 0.6-4.6-1.0 Consumption growth, percent 6.4 3.9 1.5-6.6-2.7 Gross capital formation growth, percent 3.0-6.6-5.7-17.1-0.4 General government balance, percent of GDP 0.4-1.3-1.2-4.5-2.6 Current account (US$ billions) 71.3 34.1 56.7 83.1 79.7 percent of GDP 3.6 1.6 3.0 7.1 5.8 Capital and financial account (US$ billions) -32.3-62.2-143.2-130.2-79.7 percent of GDP -1.6-3.0-7.6-11.1-5.8 CPI inflation (average) 5.1 6.8 7.7 17.5 9.0
Russia s Diverging Growth Performance 12 Quarterly GDP growth, percent, y-o-y 8 4 0-4 -8-12 OECD Oil-exporters OECD Other Emerging Russia EU Emerging