Russia Slowdown Scenario Becomes More Likely in 2014

A drop in industrial activity and investment, coupled with lower commodity exports, point us to revisit the Russia slowdown scenario in 2014. The latest figures for Q2 2013 GDP growth, released by the Russian Federal Statistics Service, show that the Russian economy grew by only 1.2% compared with the same period a year earlier, significantly below the Russian Ministry of Economic Development’s forecast of 1.9%. Russia’s economic growth has slowed every quarter since Q1 2012 – in Q4 2011 Russia recorded 5.1% growth compared to only 1.2% in Q2 2013

Figure 1. Russian Economy Slows

Source: Euromonitor International

Slower industrial activity and investment compounded by a drop in commodity exports

  • Flattening commodity exports are a concern for Russia given the economy’s strong dependence on exports of mineral resources. While monthly export figures in US dollar terms remain near pre-crisis levels, the trade balance surplus is falling and no longer provides the same “kick” to the economy as it did in the mid 2000’s (see Figure 2). Here, in particular, exports showed a 3.8% drop in the first half of the year, while imports increased by 4.4% over the same period. This could be seen as an indirect result of Russia’s accession to the WTO last year.

Figure 2. Smaller Contribution of Trade Surplus to GDP

Source: Russian Federal Statistics Service

  • A slowdown in fixed capital investment in Russia worsened significantly in June, dropping by 3.7% year-on-year. For comparison, investment was one of the growth drivers during the first half of 2012, growing by 12.8% year-on-year.
  • Industrial production recorded no growth over Q1-Q2 2013 in comparison with 2-4% growth registered a year earlier.
  • Construction also appears to be losing momentum, down 3.6% in Q2 2013 (for comparison Q1 2013 registered +0.6%).
  • Freight turnover (including commercial and noncommercial) declined by 1.8% in Q1 2013 and was flat in Q2. In particular, freight loading on railway transport fell by 4.1% in Q1 2013, and by 3.3% in Q2 2013. This indicator is especially relevant, since it is measured in tones/kilometers and reflects the physical quantity of trade, being less dependent on the inflation measures.
  • Labor market statistics are also beginning to show signs of concern. In 2013, the number of unemployed people has started rising for the first time since 2009.

Figure 3. Annual Change in Unemployed Population

Source: Russian Federal Statistics Service

More optimism for the second half of the year but increased risk of slowdown in 2014

In all likelihood, the second half of the year will look better for the Russian economy.

  • The agricultural sector, for instance, is starting from a low base of 2012 as large areas of the country were affected by drought. Agricultural production declined by 10.6% in Q4 2012, and so this year’s harvest will surely look better.
  • Retail trade also remains healthy, up 4% and 3.5% in Q1 2013 and Q2 2013, respectively. However, it should be noted that growth is being mirrored by a significant increase in consumer credit with 37.4% y-o-y growth in 2013Q1.

However, the latter factors have a rather temporary effect. While the overall negative trend from quarter to quarter is becoming increasingly obvious, Euromonitor International has revised its outlook for the Russian economy, with the slowdown scenario in Figure 4 now becoming more likely.

 Figure 4: Slowdown Scenario Becomes More Likely in 2014

Source: Euromonitor International

Summing up, we expect a better overall economic growth in Russia in the second half of the year. This is mostly justified by considerably low base of last quarters in 2012 and could result in 2.0-2.5% real GDP growth rate this year. However, the probability of the slower growth in Russia in 2014 becomes significantly higher, with annual real GDP growth rate expected at less than 3%, which is way below the 5-6% target stated by the Russian president after the March 2012 elections.