By Mühdan Sağlam
Russia Economic Outlook for 2017

Mühdan Sağlam is a PHD Candidate and Research Fellow in Ankara University Department of International Relations since 2013. Her area of expertise is Russian and Eurasian energy politics and international political economy. She is author of the book, Gazprom'un Rusyası (Gazprom's Russia), published in 2014.  

 

Last year was one of the worst years for the global escalation of conflicts, terrorist attacks, and geopolitical rivalries. Economic crises topped the agenda of many countries, particularly oil dependent economies. From Venezuela to Saudi Arabia and Russia, most energy-rich oil exporters focused their efforts to reform their economies and balance economic woes with the funding of social programs. Russia also endeavored to decrease the impact of Western economic sanctions on its economy which were imposed since 2014.  Despite Russia being a leading country internationally, stagnation was the primary subject of Russian President Vladimir Putin’s annual press conference on Dec.23, 2016.

International Monetary Fund (IMF) reports forecast that the Russian economy will strongly recover and the growth rate is expected to reach 1.1 percent in 2017 due in part to higher oil prices. Inflation has continued to decelerate and is now projected to decline to 5.6 percent at the end of 2016. Currently, Russia’s economy has already transitioned from crisis to stagnation with the prospect of overall growth in the first quarter of 2017. A higher rate might occur if large-scale structural reforms are implemented.

To contain Russia’s economic turmoil, the government has implemented some serious measures. Recently, Moscow pushed the privatization button to fund the state budget and show that the country is able to overcome the adverse effects of Western financial and economic sanctions. A 10 percent stake was sold in Russia’s diamond company, Alrosa for $814 million and Russian oil giant Rosneft’s 19.5 percent stake was sold to a foreign consortium. Further privatization steps are expected in 2017.

Due to economic sanctions which banned the import of certain foods, the Russian government encouraged domestic food companies with government incentives and decreased government intervention in the food market. These endeavors created a new climate for competition and rapid growth of the agriculture sector. As a result the share price of national companies increased by 27 percent.

Corruption has remained a major issue in Russia since its post-Soviet history. Although this has been reduced in the Putin era since 2000, some officials are still linked to corruption. The high ranking Alexei Ulyukaev, the former economic development minister of the Russian Federation, was arrested on suspicion of taking a $2 million bribe in a deal linking the state-controlled oil giant Rosneft on Nov. 14, 2016,  in addition to some government officials at federal and regional level. 

Fighting inflation has also been a crucial problem that the government tackled in 2016 by sticking to a strict monetary program during the year. Russia closed the year with 5.4 percent inflation, following on from 5.8 percent in November. This was the lowest inflation rate since June 2012, according to preliminary estimates. The lowest rate of inflation was seen in the country in April 2012 with 3.60 percent. Apart from several spikes in the first two months of 2016, the Russian ruble was relatively stable against the U.S. dollar, with an exchange level of 62-67 rubles per dollar.

The receccion which begain the in the third quarter of 2014 continued into 2016 and a fall in real income supressed domestic demand. The overall decline is projected to be an additional 5.3 percent for 2016.  Moreover, the number of people who are on a minimum wage of almost 7,500 ruble have also increased. Before the crisis, 12 million Russians earned less than the minimum living wage and this number reached 20 million at the end of 2016.

According to the World Bank, Russia has continued its adjustment to lower oil prices and the environment of economic sanctions, despite the slower decline in GDP. The main facilitators for this adjustment include offering a flexible exchange rate policy, expenditure cuts in real terms and bank recapitalization. 

In June 2016, Russia's Central Bank cut its key interest rates very slightly by 0.5 percent from 11 percent to 10.5 and then a half point further from 10.5 to 10 in September 2016. Amid the decreasing inflation, such a high-interest rate clearly limited economic activity and the ability to overcome the crisis in the country. The bank plans to lower the rate to the level of 6.5-6.75 percent in 2017 if inflation reaches the core level of 4 percent.

Another big obstacle for the Russian government was the budget deficit in 2016. The government used profits from privatization and loans along with the the government’s accumulated savings to support the deficit.  The budget deficit stopped increasing and stabilized at 2.4 percent of GDP (1.8 trillion rubles, or $29.9 billion) compared to 2.6 percent in the previous year.

The IMF, World Bank and the Organization for Economic Co-operation and Development (OECD) forecast that after two years of recession, the Russian economy would grow positively in 2017 between 0.6-1.1 of GDP expectations, with the anticipated increase in higher real wages and private consumption while lower interest rates would fund investments. However, all of the international economy authorities underline the importance of further diversification of the economy. Moreover, during this recovery period, assets will be still dependent on the level of oil prices.

IMF forecasts that oil prices will average $50 per barrel for 2017, while the U.S. Energy Information Administration foresees $52 and World Bank is expecting $55 per barrel.  The oil price growth at the end of 2016 marked the beginning of a new trend. Now a more optimistic view has arisen that the average price of oil in 2017 will be around $50 per barrel. The government, however, has forecast and has planned its budget assuming an average of $40 per barrel.

For 2017, Russia targets to return to stable and balanced economic growth rates. The economy will grow on average 1 percent. However, the crises in real income and the unbalanced state budget are still key obstacles for the economic authorities. In addition, oil prices’ forecast will also strengthen the government’s hand for 2017. Therefore Moscow could reach its economic target if oil prices are at a sufficiently high level in 2017. The outstanding problem for the government is structural reform in the economy. Russia’s mid-term economic stability depends on the government’s decisiveness to make actual structural reforms, it determination to continue fighting corruption and to carry out productive dialogue with businesses.

 

- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy. 

 

 

06 Jan,2017
ANALYST