Russia Politics July 2017


Russia: Sanctions threaten to put a lid on growth

July 31, 2017

The United States’ Senate passed sweeping legislation on 27 July, tightening sanctions on the Russian economy, a move which threatens to cap the country’s pace of economic recovery. The measures—which still need to be approved by the President Trump—include limiting financial transactions with Russian entities, asset freezes and a trade ban on certain energy sector or military-related goods. At this point, it is difficult to determine the impact of the economic attack on Russia’s economy. Russia currently faces wide-ranging sanctions from a number of countries, including the European Union, and while these measures had initially dampened confidence in the country and weighed on the ruble, the effects have waned over time and trade data has improved notably this year despite sanctions being in place. Moreover, growth is currently on an upward trajectory, supported by better conditions both at home and abroad, and GDP is expected to expand this year after a nearly two-year-long recession.

Behind the economic momentum we are currently seeing is a less-tight monetary policy, a recovering labor market and an improved external backdrop, which are supporting the recovery despite the presence of economic penalties from abroad and still low oil prices. Confirming this, the Russian Ministry of Economic Development estimated that growth had surged by 2.9% year-on-year in June, bringing second quarter GDP growth up to 2.7%. While official statistics from the Federal State Statistics Service (Rosstat) are still outstanding, incoming data paints a bright picture as exports soared by almost 30% in May and consumer confidence rose to a nearly three-year high in Q2.

These factors are likely to shield the short-term growth outlook from being derailed by the tightening of U.S. sanctions, but the measures are expected to cap the speed of growth in the long-term. Increased political tensions with the United States and the fresh economic measures are expected to deter investment in the economy, which could limit future growth.

Overall, our panel took a wait-and-see approach to recent developments this month and held Russia’s GDP forecast for 2017 unchanged. The Consensus Forecast from our panel of over 40 Russia analysts is for GDP to grow 1.3% this year and expand to 1.7% in 2018.

Author: Angela Bouzanis, Senior Economist

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