Recession confirmed in Russia

The trends in Russian economy reflect the sharp drop in real household revenues, as consumers anticipated the upsurge in inflation and made early purchases in late 2014. Investment continued to contract. The recession would have been much worse without the support of military spending, which bolstered industrial activity.

The Russian economy swung into recession in Q1 2015 with GDP. After holding up well in Q4 2014, household consumption plunged down, and retail sales declined. The drop-off in automobile sales was even more spectacular, down 45% since the beginning of the year.

Q2 2015 indicators show a worsening of the recession as public spending stopped being a support factor. IP declined 5% year-on-year in April-May, retail sales plunged 9.6% and investment was down 6.2%. Yet foreign trade acted as a shock absorber. On average in April-May, exports declined and imports were down.

However, On the one hand, the depreciation of the rouble should have generated a substitution effect for imports and improved the export competitiveness of certain basic industrial goods. On the other hand, the order books component of the manufacturing PMI index continued to deteriorate through May.

"All in all, the decline in GDP could be limited to between 3% and 4% in Q2 2015", forecasts BNP Paribas.

The government is also trying to conduct a substitution policy for imports via an industrial development fund, that offers preferred financing conditions to capital goods and pharmaceutical companies.

"Hopes for a recovery will depend on maintaining the financial stability that has been reestablished since February. The size of the rebound will continue to be constrained by financial sanctions, which were extended until January 2016, and the announced reduction in public investments from 2.1% of GDP in 2015 to 1.5% in 2018", added BNP Paribas.