Russian Recession Risk Seen at Record as Oil Saps Economy

Updated on
Weakening Ruble
Foreign currency exchange rates sit illuminated on an electronic sign outside a currency exchange bureau in Moscow, Russia. The ruble has weakened more than 25 percent against the dollar in the past three months, the worst-performer among more than 170 currencies tracked by Bloomberg. Photographer: Andrey Rudakov/Bloomberg

Russia will sink into recession at a Urals price of $80 a barrel, seven years after its economy grew 8.5 percent when its chief export oil blend averaged near $70, according to a Bloomberg survey of analysts.

Urals at $80, or about $3 cheaper than its average in the month through November 15, will tip Russia into a contraction, according to the median estimate of 32 economists. The probability of a recession in the next 12 months rose to 75 percent, the highest since the first such survey more than two years ago, according to another poll.

Russia, which receives about half of its budget revenue from oil and gas taxes, is closing in on its first slump since 2009 after dodging recession this year as it lurched from one crisis to another following the takeover of Crimea from Ukraine in March. Consumer spending, which accounts for half of the $2 trillion economy, is failing to make up for lost revenue with oil mired in a bear market amid concerns over a global glut.

“Growth in domestic demand, which has been the major driver for the last several years, is almost exhausted,” Anna Bogdyukevich, an economist at ZAO UniCredit Bank, said by e-mail. “The economy may contract even if the oil price remains at its current level for an extended period of time.”

Outflows, Inflation

Besieged by U.S. and European sanctions over Ukraine, the economy is hamstrung by shrinking investment, the biggest capital outflow since 2008 and the fastest inflation in more than three years. The central bank last month brought its key interest rate to the highest since it was introduced in September 2013.

“Capital flight, inflation, higher interest rates, financial turmoil and increasing numbers of company defaults will grow into recession within the next 12 months,” Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg, said by e-mail. “This year Russia will manage to get away without recession. But recession is on its way.”

The ruble has weakened more than 25 percent against the dollar in the past three months, the worst-performer among more than 170 currencies tracked by Bloomberg. It depreciated 1.2 percent to 49.22 per dollar as of 4:23 p.m. in Moscow. The dollar-denominated RTS stock index slid 2.4 percent to 982.80, on track for a fifth monthly drop.

OPEC’s Restraint

Brent, the grade of oil traders look at for pricing Russia’s main export blend, fell below $75 a barrel for the first time since September 2010 after OPEC kept its oil production unchanged at yesterday’s meeting.

Oil prices may reach an equilibrium at about $80 per barrel, though Russia should prepare for any scenario, Economy Minister Alexei Ulyukayev told reporters in Moscow today. His ministry will cut its oil price estimate as it updates forecasts, according to Ulyukayev.

Urals prices averaged $82.67 per barrel Oct. 15-Nov. 15, compared with $91.75 a month before, according to the Finance Ministry in Moscow.

Given OPEC’s decision, an oversupply of oil in the market will persist, said Maxim Oreshkin, head of the Russian Finance Ministry’s department of strategic planning.

“In these circumstances, even a scenario of $80 a barrel in the coming years can already be seen as moderately optimistic,” he said in a statement yesterday. “This situation once again confirms our position that Russian fiscal policy should adapt to new oil prices, which may remain low for an extended period of time.”

Growth Outlook

The central bank has lowered its forecast for economic growth in its main outlook for 2015 to zero and pushed back its estimate for meeting an inflation target of 4 percent by one year from 2016, according to revisions published Nov. 10.

Gross domestic product will expand 0.1 percent in 2015, down from 0.8 percent predicted a month ago, according to economists in a separate Bloomberg survey. Inflation will reach 9 percent this quarter and 9.3 percent in the first three months of 2015, before starting to slow down, according to economists’ median estimates.

Consumer-price growth accelerated to 8.3 percent in October, the fastest since July 2011. Policy makers have raised their main rate four times by a cumulative 400 basis points since March to rein in inflation. The Bank of Russia increased the benchmark to 9.5 percent from 8 percent when it last reviewed borrowing costs Oct. 31.

Monetary Easing

The key rate will drop to 8 percent by the end of the first quarter in 2016 and fall to 7.5 percent three months later, according to the median estimate of 15 economists in a survey. The central bank is considering potential monetary easing starting from the second half of next year, Governor Elvira Nabiullina said this week.

The regulator hasn’t intervened on the currency market since Nov. 10. It moved to a free-floating exchange rate ahead of schedule this month after its rules-based interventions drained its reserves by about $90 billion since the beginning of the year to $420.4 billion.

The central bank will resume its discretionary currency interventions if the ruble weakens to 50 per dollar, according to the median estimate of 23 economists.

The Bank of Russia may still conduct “large-scale” interventions if it sees risks to financial stability, Nabiullina told lawmakers in Moscow two days ago.

“If at these oil price levels we hit 50 or very close in rubles per dollar, we expect the central bank to intervene to shake up and blow out speculators,” Vladimir Miklashevsky, a strategist at Danske Bank A/S, said by e-mail. “At the current oil price, we do not exclude touching 50 as geopolitical woes can escalate at any moment.”

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