Daily Management Review

Declining Oil Prices Force Russian Economy to Shrink Most Since 2009


Declining Oil Prices Force Russian Economy to Shrink Most Since 2009
Oil decline and sanctions over the conflict in Ukraine that curbed access to international financing has forced Russia's economy to get contracted the most since 2009 last year as the country faces renewed pressure from plunges in energy prices and the ruble.
The Federal Statistics Service said on Monday on its website citing preliminary estimates said that the gross domestic product fell 3.7 per cent after growth of 0.6 per cent in 2014. Forecast of a 3.8 per cent drop was made in a survey of economists by Bloomberg. Spending continued to decline as real wages and disposable incomes fell further, a separate release of consumer data for December showed.
"The economy's going through big adjustments - it's still addicted to oil. The weak ruble and import substitution will continue to support local production, although on a moderate path. It's a long and painful journey to recovery," Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said.

After crude prices resumed their slump at the start of 2016, the ruble has been sent tumbling down as the economy of the world's largest energy exporter is facing a second year of contraction. There is limited room for monetary-policy makers to trim borrowing costs with inflation at more than three times their medium-term target. The policy makers are scheduled to meet on Friday to discuss interest rates. The central bank has held its benchmark at 11 per cent for three meetings.
Noting its worst performer among 24 emerging-market currencies tracked by Bloomberg, the ruble has lost more than seven per cent against the dollar this year. As volatility in global markets adds to concern over swollen US stockpiles and the prospect of increased Iranian exports, oil has fallen about 15 per cent in 2016.
The regulator is 'vigilantly' monitoring the situation and is ready to step in, the Bank of Russia Governor Elvira Nabiullina has said. After shifting to a free float of the ruble, the central bank hasn't sold foreign currency since late 2014. In order to avoid running down the reserves it built up when oil prices were higher, officials have warned that Russia must cut spending.
With retail sales diving 15.3 per cent from a year earlier in December, Russian consumers are suffering amid the recession. This matched the median forecast in a survey of economists. While disposable incomes fell 0.7 per cent, less than the 5.6 per cent decline seen by economists, wages adjusted for inflation plummeted 10 per cent, more than analysts predicted.
The situation is worsened by inflation. Inflation is still at 12.9 per cent, compared with the central bank's goal of four per cent by the end of 2017 while consumer-price growth slowed in December. Ruble's latest losses and bans on Turkish products such as fruit and vegetables after Turkey's military shot down a Russian warplane near the Syrian border are some of the pressures that have the potential to pushing inflation higher again.

Fixed-capital investment shrank 8.7 per cent, extending a slump that began two years ago, unemployment was a rare bright spot last month, staying at 5.8 per cent. Since Bloomberg began compiling the data in 1995, this is the longest period of decline.