Russia: Stagnant oil price dampens economic outlook


Matthew Turner
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Corruption and institutional risk constrain ability to revive growth.

Weaker economic activity had a negative bearing on Russia’s risk assessment in Q1-2013, as real GDP growth dipped to a new post-crisis low.

Analysts participating in the ECR survey downgraded Russia’s ECR score by 1.1 points to 51.6 in March, as country risk experts become more alarmed about the sustainability of its economic growth trajectory.

The sovereign’s ECR score decline in Q1 was underpinned by a lower economic outlook and a deteriorating political assessment.

Growth figures released last week revealed that the Russian economy slowed to 1.6% y/y in Q1, down from 2.1% y/y in Q4.

A rebound in economic growth is constrained by high inflation and the fact that real interest rates are close to zero.

“High inflation has so far prevented the [Central Bank of Russia] from cutting interest rates and there is a real risk that aggressive monetary easing will simply fuel inflation,” states a report by Capital Economics.

The report identifies a fiscal stimulus as the most plausible and only scenario to stimulate growth. “Fiscal stimulus is most likely to boost growth if it is targeted on capital expenditure,” the report continues. “Unless this happens, fiscal policy is unlikely to play a significant role in reviving Russia’s economy.”

Conversely, an outlook report on the Russian economy by HSBC reckons the government could “tighten fiscal policy to make growth sustainable and resilient to oil-price shocks in the long run”.

And this could have a negative impact on the country’s credit rating, according to a report by Moody’s. It states: “Russia’s rating would come under downward pressure as a result of an increased susceptibility of fiscal metrics to oil-price shocks.”

Russia’s slowdown this quarter follows a spate of disappointing growth figures across emerging markets in recent months. Worryingly for Russia, the IMF identifies the Russian economy as a perennial under-achiever among the Bric economies.

The IMF forecasts real GDP growth to be slowest in Russia among the Bric economies in the medium-to-long term (see graph below).


Russia’s ability to kick-start the economy and revive economic growth have been impaired by a weak institutional framework.

Its political assessment score declined for the fifth consecutive quarter in Q1-2013 amid concerns about corruption (-0.1), government stability (-0.1) and institutional risk (-0.1).


Russia, with a political assessment score of 42.1, is considered politically riskier than Greece.

A report by Moody’s attributes Russia’s weak institutional strength as an impediment to economic growth and a main credit weakness.

“In the absence of significant measures designed to improve institutional strength and to foster economic diversification, we expect these medium-to-long-term challenges, including a lack of investment, to exert increasing downward pressure on Russia’s rating,” notes Moody’s.

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