Trends In The Russian Economy

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Summary

The industrial growth in Russia, recorded in June, is mostly attributed to the base effect.

The Russian government is getting ready for a long period of austerity.

In 2015, Russia's GDP fell by 3.7%, while the official military expenditure grew by 48%.

The period of restoration of oil prices in the first half of this year has had some beneficial effect on the Russian economy. The production sector has demonstrated positive growth rates, and the GDP's rate of decline has slowed down. However, as long as the oil price is quite predictably distancing from the level of $50 per barrel, the fragile signs of stabilization are also disappearing.

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In June, the Russian production sector demonstrated growth of 1.7% YOY, exceeding the expectations of many analysts. But in my opinion, the recorded growth was a result of the base effect and a relatively high oil price, rather than a real improvement. Click to enlarge

Source of data: Federal State Statistics Service

The situation clears up to a greater extent if we analyze the dynamics of other key Russian industries. Besides the production sector, only agriculture is growing in Russia, which is partially explained by the fall in the volume a year earlier. In June, the construction volume fell by 9.7% YOY relative to the decline of 8.7% YOY a year earlier. In 2016, the retail turnover is declining each month at an average rate of 6% YOY, with no apparent trend towards improvement. It is also worth mentioning that in July the Primary Consumer Confidence Index in Russia, according to Reuters, reached its multi-year low of 35.5%, indicating the disappearing optimism of Russian consumers.

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Source of data: Federal State Statistics Service

And finally, the key evidence of instability of the current industrial growth is the continuing dynamics of decline of fixed capital investments. As of Q1 2016, the fall of investment in fixed capital amounted to 4.8% YOY, indicating a stable unwillingness of companies to make long-term investments into their businesses.

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Source of data: Federal State Statistics Service

The interesting point is that, apparently, no one in the government expects substantial economic improvement in the next few years. At the end of June, the Ministry of Finance of the Russian Federation proposed to freeze the budget expense for a three-year period, and this idea has already received the support of the Prime Minister. Moreover, almost direct instruction of the President to prevent the excessive strengthening of the national currency indicates that no one expects economic growth. On the contrary, there are challenging times ahead.

The fact that Russia is obliged to maintain high levels of military expenditure is further complicating the situation. According to a report provided to the UN, the combined military expenditures of Russia in 2015 increased by 48% relative to 2014, amounting to 2.9 trillion rubles (~43 billion dollars) or 3.2% of the GDP. It is worth noting that Russia reports its defense spending to the UN in an abbreviated form, and the real figures are, probably, much higher. According to expert estimates, Russia's defense spending amounted to 5.3% of the GDP in 2015. It is worth noting that in 2015 Russia's GDP declined by 3.7%.

The military expenditures are usually inertial, and taking into account the foreign policy of President Putin, it is unlikely that increase in these expenditures would be significantly slowed down regardless of any decline in the GDP.

Conclusion

The improvement in some parameters of the Russian economy is occasional and not stable. And the long-term budget savings plan significantly restricts the ability of domestic growth. In addition, the country has to pay high military expenses. Assuming that Russia has already passed the bottom of the crisis in its economy, now a stagnation, rather than steady growth, is expected.

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