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Bearing up

3 September 2015 By Neil Unmack

Russia’s economy should be in intensive care. An oil price of around $50 a barrel is a disaster: Citigroup estimates GDP falls 0.8 percent for every $10 decline in the oil price, and the state fiscal balance previously relied on a level twice the current oil price. Add in the effect of sanctions cutting off international funds, and the recession may well drag into 2016.

Yet President Vladimir Putin has ways to offset the pain. Despite the falling rouble, a currency crisis has not materialised. Russian companies’ external dollar liabilities look manageable. And the weak currency has benign effects as well: state expenses and salaries fall, hedging the decline in petrodollars. The weaker rouble helps Russian farmers replace imports, and may even boost exports – Renaissance Capital estimates Russian wages are now lower than in China.

The government also has resources to cope with falling revenues. Russia has a low stock of debt. It also has a 4.27 trillion rouble ($63 billion) reserve fund to help fund deficits and investment.

Even if a lasting recession pushes up bank losses, lenders look relatively protected. The government has backstopped their capital, and allowed them to use pre-crisis inputs to measure loss and off-market foreign exchange rates. There may be a cost to such support: Standard & Poor’s reckons banks have been rolling over debt to regional governments at subsidised rates. It expects regional borrowings to hit 4.7 trillion roubles in 2017, from just over 1 trillion roubles in 2011.

It’s a fragile equilibrium. The government wants to balance its fiscal budget by 2018. If the oil price doesn’t recover, deep spending cuts will become unavoidable even as the economy stagnates. The government is likely to partially freeze pension payments. So far, austerity has not materially damaged Putin’s popularity. It helps that unemployment has remained low at just over 5 percent.

The current policy may not alleviate Russia’s longer-term challenges. Domestic companies will struggle to benefit properly from a falling rouble as long as sanctions impair access to international funds, and investment suffers from corruption and an overbearing state. Yet barring a further lurch down in the currency, or an increase in economic sanctions, Russia can tough out the oil crisis.


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