Unexpectedly strong IP in December (+3.9% y-o-y); the Government publishes its anti-crisis plan

RUSSIA ENERGY / FINANCE - In Brief 28 Jan 2015 by Marcel Salikhov

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Last couples of days for Russian financial markets were influenced by S&P’s decision to cut Russia’s sovereign rating below investment grade (to BB+ from BBB-). S&P cited was worsening economic outlook and weakening monetary policy flexibility as a rationale. But the decision was expected and to the large extent ‘priced in’. There was also some positive news. Industrial production showed surprisingly strong growth in December (+3.9% y-o-y). Manufacturing index grew 4.1%, largest growth since May. Industrial boost was supported by imports substation effect (especially in the food processing), growing defense expenditures and temporary spike in consumer demand. We believe that decline in aggregate demand due to fall in real incomes; ‘crisis’ consumer behavior, tight monetary and fiscal policy will lead to industrial drop in early 2015. We expect consumer expenditures to decline 5-6% in 2015 while investments will fall 13-15%. The Government published details of its anti-crisis plan that was developed in recent weeks. We note an obvious contradiction between announced expenditures cut by 10% (except defense and social expenditures) and various extra initiatives to spend more. The plan doesn’t explicitly state what kind of expenditures would be cut. In general, we think that new expenditures will be matched by cuts. So there would be no meaningful fiscal stimulus for aggregate demand at least in 2015. Support for the economy will be channeled mainly through state and private banks. The state will provide fresh capital for banks to support credit. On Friday there will be CBR’s meeting on monetary policy. We expect ‘no-change’ decision. CBR is under pressure to loosen moneta...