Russian Economy Shrinks Most Since 2009 as Oil Prices Sink

Can Russia Handle Ruble-Dollar Weakening to 100?
  • GDP drops 3.7% in 2015, less than 3.8% fall seen in survey
  • Renewed plunge in crude at start of 2016 may extend recession

Russia’s economy, facing renewed pressure from plunges in energy prices and the ruble, contracted the most since 2009 last year on oil’s decline and sanctions over the conflict in Ukraine that curbed access to international financing.

Gross domestic product fell 3.7 percent after growth of 0.6 percent in 2014, the Federal Statistics Service said Monday on its website, citing preliminary estimates. Economists in a Bloomberg survey forecast a 3.8 percent drop. A separate release of consumer data for December showed spending continued to decline as real wages and disposable incomes fell further.

“The economy’s going through big adjustments -- it’s still addicted to oil,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by e-mail. “The weak ruble and import substitution will continue to support local production, although on a moderate path. It’s a long and painful journey to recovery.”

The economy of the world’s largest energy exporter is facing a second year of contraction after crude prices resumed their slump at the start of 2016, sending the ruble tumbling to a record. Monetary-policy makers, meeting Friday to discuss interest rates, have limited room to trim borrowing costs with inflation at more than three times their medium-term target. The central bank has held its benchmark at 11 percent for three meetings.

Currency Weakness

The ruble has lost more than 7 percent against the dollar this year, the worst performer among 24 emerging-market currencies tracked by Bloomberg. Oil has fallen about 15 percent in 2016 as volatility in global markets adds to concern over swollen U.S. stockpiles and the prospect of increased Iranian exports.

Bank of Russia Governor Elvira Nabiullina has said the regulator is “vigilantly” monitoring the situation and is ready to step in. The central bank hasn’t sold foreign currency since late 2014 after shifting to a free float of the ruble. Officials have warned that Russia must cut spending to avoid running down the reserves it built up when oil prices were higher.

Russian consumers are suffering amid the recession, with retail sales diving 15.3 percent from a year earlier in December, matching the median forecast in a survey of economists. Wages adjusted for inflation plummeted 10 percent, more than analysts predicted, while disposable incomes fell 0.7 percent, less than the 5.6 percent decline seen by economists.

Inflation Pain

Inflation is making the situation worse. While consumer-price growth slowed in December, it’s still at 12.9 percent, compared with the central bank’s goal of 4 percent by the end of 2017. And there are pressures that risk pushing inflation higher again, including the ruble’s latest losses and bans on Turkish products such as fruit and vegetables after Turkey’s military shot down a Russian warplane near the Syrian border.

While unemployment was a rare bright spot last month, staying at 5.8 percent, fixed-capital investment shrank 8.7 percent, extending a slump that began two years ago. That’s the longest period of decline since Bloomberg began compiling the data in 1995.

“It’s very unlikely that we’ll witness a V-shaped recovery due to the prospect of lower-for-longer oil prices and the ongoing contraction in domestic demand,” said Piotr Matys, a strategist for emerging-market currencies at Rabobank in London.

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