Another False Start for Russia as Oil Spells Longer Recession

Does Russia Have a Strategy for Dealing With Oil's Slide?
  • Banks including JPMorgan seeing slump stretch into second year
  • Declining oil prices sap budget revenue, hit ruble, inflation

A renewed sell-off in oil means the Russian economy will be testing new lows for much of next year.

With crude trading near the lowest since mid-2004, banks including JPMorgan Chase & Co. say a second year of recession is all but inevitable. JPMorgan reversed its call for 0.5 percent growth next year, predicting a 0.2 percent contraction instead, while the World Bank worsened its forecast to a decline of 0.7 percent. Barclays Plc said last week’s batch of consumer data also signaled an “extended recession.”

The collapse of crude prices remains a challenge to President Vladimir Putin, who said last Thursday that Russia had put the worst of the economic crisis behind it. While gross domestic product contracted at a slower annual pace last quarter, the dropoff in oil can stop the recovery in its tracks by eroding budget revenue, crippling the ruble and stoking inflation, forcing the central bank to withhold monetary easing.

“The recent slide in commodity prices will likely delay Russia’s recovery into the second half of 2016,” Anatoliy Shal, an analyst at JPMorgan in Moscow, said in an e-mailed note. “The Bank of Russia easing cycle looks likely to restart only in the second quarter of 2016 due to the weaker ruble and slower disinflation.”

Ruble, Inflation

The Russian currency closed at a record low against the dollar as Brent crude fell toward $36 a barrel. The ruble has lost more than 9 percent in the past month against the dollar, the world’s worst performer after the currencies of Azerbaijan, Argentina and Kazakhstan. Based on historical data, Societe Generale SA estimates that a 10 percent ruble depreciation adds about 50 basis points to a full percentage point to annual inflation in Russia.

Brent crude, used to price Russia’s main export blend, touched $36.04, the lowest level since July 2, 2004. Prices are down 37 percent this year, set for a third annual loss.

A drop in oil of $10 per barrel cuts Russia’s annual export revenue by about $25 billion, equivalent to 2 percent of 2015 GDP, according to Capital Economics Ltd. Since gas closely tracks the price of oil, Russia stands to lose about $5 billion more, or 0.4 percent of GDP, as a result of smaller gas sales, it estimates.

‘Very Optimistic’

A two-year recession would mean the longest slump for Russia in two decades. The country has to be prepared for “any scenario,” Finance Minister Anton Siluanov said Dec. 16. Putin said during his annual news conference last week that a price of $50 per barrel for 2016 is “very optimistic.” Next year’s budget is based on oil at $50.

GDP will contract as much as 3 percent next year under the central bank’s “risk scenario,” which sees crude at $35. As the slump in oil prices triggered a new bout of ruble weakness, policy makers kept their benchmark interest rate unchanged at 11 percent for a third consecutive meeting this month.

The central bank estimates the economy will shrink 0.5 percent to 1 percent in 2016 before expanding as much as 1 percent the following year. GDP will contract 3.7 percent this year, according to Economy Minister Alexei Ulyukayev. Lower oil prices give grounds for reviewing a forecast for 0.7 percent growth next year, RIA Novosti reported Monday, citing Ulyukayev

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