Russia Weathering Oil Price Plunge Better than Expected

The World Bank says Russia’s economy may not be headed for as bad a recession as previously forecasted, yet it stressed that global economic ambiguities leave the outlook uncertain.

The report, posted on the bank’s website on June 1, said Russia’s economy, hit hard by the drop in energy prices over the past year as well as by Western sanctions, attributed its improved forecast to a modest revival of oil prices, a stronger ruble and “a slightly faster retreat of inflation.”

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As a result, the Bank of Russia, the country’s central bank, would be able to ease its monetary policy more quickly, further bolstering the economy, according to Birgit Hansl, the World Bank’s lead economist for Russia.

Hansl’s report forecasted a contraction of 2.7 percent in gross domestic product (GDP) for 2015, an improvement over the 3.8 percent contraction it said it expected in its report on the Russian economy as recently as April 1. The June 1 report also projected GDP growth of 0.7 percent in 2016, compared to the contraction of 0.3 percent expected in the April report.

Despite the World Bank’s more optimistic view, Hansl’s statement said the overall outlook is subject to economic factors, some of them outside of Russia’s control.

“Significant downside risks to our projection remain, as the global oil market continues to search for its new equilibrium and the commitment to structural reforms needs to be supported by a concrete set of strong policy actions,” she wrote.

The improved forecast is roughly parallel to expectations of Russia’s Economy Ministry, which has calculated a 2.8 percent contraction in GDP for 2015. Yet it, too, sees a risk of an accelerated economic downturn for the country. It reports that the country’s economy contracted by 4.2 percent between April 2014 and April 2015.

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Still, the World Bank’s report is good news for an economically beleaguered Russia. The plunge in oil prices since late June 2014 have starved Moscow’s budget of revenues needed to run so large a country. And the West has imposed sanctions on Russia for its involvement in Ukraine’s internal conflict. Both of these factors worked to depress the value of the ruble.

This year, though, the ruble has, like energy, recovered some of its value. In its April 1 report, the World Bank praised both the Bank of Russia and the Kremlin for their handling of the currency crisis, which helped the country avoid a recession through 2014. “The government and the central bank moved swiftly; policy responses to both shocks were adequate,” the report said.

In its latest report, the World Bank expects modest economic recovery next year, but it sees investment within Russia to rebound “more prominently” in 2017. But it stresses that this would rely on renewed confidence among consumers and businesses, the government’s removal of remaining traces of economic structural problems and Western nations phasing out their sanctions by the end of 2016.

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Another condition for improved economic performance would be the price of oil. The World Bank report says it expects the average annual global price of a barrel of oil to rise to $58 this year and $63.6 next year, compared with an average annual price of $97.6 in 2014.

By Andy Tully Of Oilprice.com

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