Russia’s Economy Facing Downside Risks

Russian President Vladimir Putin’s recent hawkish rhetoric implies tighter fiscal and monetary policies than we have anticipated. This has prompted us to lower our 2013 real GDP growth forecast from 3.6% to 2.6% – quite a slowdown from the 3.6% increase in 2012.

While this downgrade is substantial, it reflects the importance of Russia’s public sector in determining the shape and pace of domestic demand. It is hard to say exactly what has prompted the change of tone from the president, who had until recently been pressuring the central bank to loosen monetary policy, although Putin’s public criticism of Prime Minister Dmitry Medvedev’s economic management has prompted speculation that he is using the recent slowdown as a pretext for political advantage, rather than reflecting a genuine concern about fiscal and monetary stability.

Regardless of his motive, with Putin now apparently willing to accept a growth rate of below 3.0% this year – the economy ministry recently cut its 2013 GDP forecast from 3.6% to 2.4% – we find it hard to identify significant drivers of growth, given the weak external backdrop and slowdown in consumption.

Although our 2013 growth forecast for Russia is now some way below Bloomberg consensus estimates of 3.1% (which we also expect to be revised down following recent developments), we see risks of further downward revisions to our projections over the coming months. It is still unclear what damage the Cyprus bank bailout will have on Russian banks, and by extension domestic loan growth. We also see potential for increased political uncertainty over the next few months, as ongoing tensions between Putin and Prime Minister Medvedev increase speculation of a change in government.

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