Photographer: Andrey Rudakov/Bloomberg

Russia’s Break From a Recession Was Fleeting

Updated on
  • Russia probably suffered ‘technical recession,’ JPMorgan says
  • President stays upbeat, says economy is still ‘on the upswing’

After suffering its longest economic contraction this century, Russia may just have had the shortest recovery.

JPMorgan Chase & Co. says the world’s biggest energy exporter probably capped last year with two consecutive quarters of contraction -- or a technical recession -- a surprise cooldown that ranged from struggling consumer spending to a flop in industrial output.

Gross domestic product is still growing relative to a year earlier, with the central bank putting expansion at 1.7 percent to 2.2 percent in 2017 and predicting it will continue at a similar pace in 2018. No official GDP data is yet available past the third quarter.

Technical Recession

Russian economic recovery is sputtering despite higher oil prices

Source: JPMorgan estimates based on Federal Statistics Service data

“Growth was driven by a number of one-off factors and now these are unwinding,” said Liza Ermolenko, an economist at Barclays Capital in London. “It does look like the output gap is pretty much closed, so there is not a lot of scope for the recovery to continue.”

The slip-up, which came against the backdrop of a recovery in oil prices, leaves the economy in a precarious position going into the new year. Although government-led efforts propped up investment in 2017 -- with Raiffeisenbank estimating that four state-led projects accounted for more than half of the total in capital spending -- some of them will come to an end already this year. 

While JPMorgan says the “weakness will be transitory,” a letdown so soon after Russia moved past the slump in mid-2015 highlights the dilemma President Vladimir Putin now faces in making the economy a selling point in a campaign for another six-year term in March elections.

What Our Economists Say...

Some methodologies may point to a contraction in the third quarter -- ours doesn’t. The expansion continues, though it’s sluggish relative to history. The final quarter of 2017 should see more of the same, bringing annual growth to about 1.7 percent.

--Scott Johnson, Bloomberg Economics

Despite Russia’s resilience to the twin challenges of cheaper oil and Western sanctions, state development lender Vnesheconombank estimates a drop in GDP accelerated on a monthly seasonally adjusted basis in September, October and November.

‘Lost Momentum’

“The Russian economy lost momentum in the second half after a very strong first half,” said JPMorgan analyst Anatoliy Shal. “The extreme weakness of the past couple of months comes as a surprise.”

Putin has stayed upbeat, telling factory workers on Wednesday that the economy is still “on the upswing.” As evidence, he pointed to a budget deficit running narrower than expected and growth in gold and foreign-currency reserves.

The broader drop-off in output went unmentioned, however. GDP contracted at a seasonally adjusted annual rate of about 1.5 percent in the last three months of 2017 from the previous quarter, after a decline of 0.2 percent in July-September, according to JPMorgan. The economy hasn’t suffered a technical recession since the first half of 2015, Vnesheconombank estimates.

The Economy Ministry has partly blamed the downbeat performance by industry on unseasonably warm weather late in the year and on oil-output curbs negotiated with the Organization of Petroleum Exporting Countries. Industrial production shrank in November for only the second time in 2017 after zero growth in October.

Behind the Numbers

Two industries in particular were a drag on manufacturing in November, according to JPMorgan. A shrinking re-armament program could be behind a decline in production of “other” transport equipment, while a possible atomic incident may have affected output of nuclear fuel and precious and base metals, it said.

“Although both factors may have little to do with the broader macroeconomic environment and the business cycle, their impact can be prolonged, thereby keeping the over-year-ago comparisons depressed in the coming months,” Shal said in a report.

Russia officially calculates GDP performance only on an annual basis. By that measure, growth peaked in the second quarter of last year at 2.5 percent, before easing in the following three months, Federal Statistics Service data show. While GDP probably added 1.9 percent in October-December before rising further this quarter, it’s set to decelerate slightly until the final three months of 2018, according to analysts surveyed by Bloomberg.

“The rebound from the lowest point of the crisis didn’t last long,” said Natalia Akindinova, director of the Development Center at the Higher School of Economics in Moscow. After mid-2017, “the trend of macroeconomic indicators reversed.”

— With assistance by Zoya Shilova, and Andre Tartar

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