The Inflation Threat
Russia’s 2015 economic slump will be deeper than previously expected, due to the unfavorable external climate and the drop in oil prices. GDP contracted by 4.6% y/y in Q2 (atop a 2.2% contraction in Q1), on decline of domestic demand and investment. Household demand has been stalled by a 10% fall in real wages. Yet record-high corporate profits due to RUB devaluation are not yet translating into capital investments.
We expect GDP to contract by 3.8%-4.0% this year, vs. the CBR’s latest forecast (in September) projecting a 3.9%-4.4% contraction. The outlook for 2016 remains grim. The CBR expects GDP to fall 0.3% next year, if oil prices average $50 per barrel.
The weaker RUB has driven inflation higher. Annual inflation reached 15.8% y/y in August, from 15.3% y/y in June. Weekly data on September inflation shows persistent pressure on prices. We believe annual inflation will continue to climb over the next few months, even if the RUB is stable. The CBR’s current forecasts assume that inflation will slow to 12%-13% by the end of 2015, and to 7% by September 2016. We see these forecasts as unrealistic, and don’t believe they can be achieved without tightening monetary policy, or without steady growth of oil prices to above $60 per barrel.
At its September monetary policy meeting, the CBR decided to leave its key interest rate unchanged, at 11%. However, the results of the September meeting, and statements by CBR chief Elvira Nabiullina, give us no reason to believe that the monetary authorities intend to raise interest rates soon. So we think market expectations of possible rate increases are overly optimistic.
Another inflation risk factor is the possible loosening of fiscal policy. This year the government will submit its draft 2016 budget not in late September, as was customary, but in late October. As there’s huge uncertainty, and unresolved conflicts in fiscal policy, delay was inevitable.
A decision on whether to index wages and pensions will be a major inflationary factor. Minfin is pushing for 4% indexation in 2016, compared to the 12% proposed by the government’s “social bloc.” But as the new election cycle begins (Duma elections will take place next September) political considerations will challenge the conservative Minfin’s policy recommendations.
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