Russia: Economy weighed down by international sanctions and low oil prices takes a nosedive in 2015
February 2, 2016
Russia’s economy recorded the steepest decline since 2009 last year on the back of a plunge in oil prices and international sanctions. These external factors, coupled with structural weakness in the economy, took a heavy toll on growth in 2015. According to a flash estimate published by the Federal State Statistics Service (Rosstat) on 2 February, GDP decreased 3.7% in the full year 2015. The result contrasted the growth rate recorded in 2014, when the economy expanded 0.7% and was virtually in line with the 3.8% decrease our analysts had expected.
The annual contraction mainly reflected a deterioration in domestic demand growth, which was dragged down by a plunge in private consumption (2015: -10.1%, 2014: +1.7%), a contraction in government spending (2015: -1.8%, 2014: +0.4%) and steeper drop in gross fixed investment (2015: -7.6%, 2014: -0.6%). Private consumption was hit in 2015 due to soaring inflation, stagnant wages and high unemployment. Meanwhile, the massive drop in oil prices through 2015 severely affected fiscal revenues and, consequently, government spending. Oil and gas account for nearly half of Russia’s government revenues and the plunge in oil (and other energy) prices prompted the government to slash spending. In fact, the government stated that it would have to make further cuts to the 2016 budget, which was adopted in October under the assumption of an average oil price of USD 50.0 per barrel. The notable plunge in gross fixed investment in 2015 was the result of slowing economic activity, international sanctions and the Central Bank’s tighter monetary policy.
The trade balance showed that exports of goods and services increased 3.1% in 2015, which marked an improvement over the 0.3% increase tallied in 2014. Growth in Russia’s exports was mainly supported by a weak ruble. On the other side of the balance, imports plummeted 25.6% in 2015 (2014: -5.9%) due to the ban that the Russian government imposed on imports from the European Union and other Western countries in retaliation for the international sanctions that these countries imposed on Russia and prolonged. Russia also imposed sanctions on imports from Turkey and Ukraine amid a recent increase in geopolitical tensions.
At the sector level, the agricultural sector increased in 2015 due to higher production on the back of the import substitution strategy followed by Russian producers. Conversely, growth in the manufacturing sector, construction and several services remained in the doldrums in 2015.
Based on full-year figures, the economy is likely to have contracted 4.0% in Q4 2015 in year-on-year terms, which, if confirmed, will mark a softer drop than Q3’s contraction and thus suggesting that the worst of the economic downturn was recorded in the first half of 2015.
The Central Bank foresees that economic growth in 2016 will depend on the dynamics of energy prices and the economy’s ability to adapt to external shocks. In its baseline scenario, the Bank expects the price for Urals Oil to average USD 50 per barrel between 2016 and 2018. As a result, the Bank forecasts a more protracted recession. It expects the economy to contract at a rate of between 0.5% and 1.0% in 2016. For 2017, the Bank expects the economy to grow at a rate of between 0.0% and 1.0%.
Author: Ricardo Aceves, Senior Economist