Russian Economy Contracts in the First Quarter

Russia’s economy contracted 1.9 percent in Q1, marking the first economic shrinkage since 2009, but analysts expected a slowdown of 2.6 percent. April’s manufacturing report showed better results than expected, with lower input inflation and higher output.

Russia’s economy contracted 1.9 percent in Q1, marking the first economic shrinkage since 2009, but analysts expected a slowdown of 2.6 percent. April’s manufacturing report showed better results than expected, with lower input inflation and higher output.

The Russian economy is not in recession territory, but Q1 data indicates that Russia is on the brink of one. Officials have taken various steps to improve the economy, such as cutting interest rates three times in 2015 and implementing a stimulus package to deal with obstacles that include lower oil prices and western sanctions imposed over the Ukrainian conflict. Russia faces tough odds, but the economy is gaining traction, and the nation’s outlook is not as dire as first predicted by analysts. The Russian government predicted a 3.0 percent contraction, but experts are now saying that such an estimate is a tad cynical.

Overall, the economy expects to shrink 2.5 percent for the year, but it may expand anywhere from 1.5 to 2.5 percent in 2016, according to Russian authorities. Institutions such as the World Bank and the European Bank for Reconstruction and Development have a more pessimistic view of future growth, but financial expert Piotr Matys of Rabobank believes the economy will make significant headway in the second part of the year, and the central bank may cut rates by 100 to 150 points with each meeting.

Russian officials may share the same rosy outlook, but underlying barriers can still hamper Russia’s performance, most notably lower consumer demand, which hurts Russia’s corporations. Russians are dealing with higher prices since the government banned certain imports from the EU, and inflation and a weaker currency has lowered spending power. Further, Russians are dealing with a year-on-year 8.4 percent slowdown in real wages for Q1, and manufacturers have been cutting jobs to adjust to the economic shift.

Russia’s ruble has been performing well against the dollar, which is a vast improvement when compared to the ruble’s dramatic fall in 2014. Further, the central bank is selling rubles, the first time since June 2014, to replenish the nation’s currency reserves. The central bank also implemented policies to help banks hurt by sanctions and low-value currency. These measures have been in place since December 2014, and the bank plans to extend the programs until October.

Russian bonds shot up 45 percent in dollar terms, and the country’s RTS Index increased 36 percent for 2015. However, this does not mean Russia’s financial status is secure because the country remains isolated from the world markets due to sanctions. On the plus side, many investors have not abandoned Russia thus far, and the overall shape of Russia’s private sector remains intact.