Russian sentiment indicators show pessimism amongst economic players; ruble likely to remain weak

The economic scenario for Russia is now improving based on recent data. The economy had contracted 3.7 percent last year and appears to be stagnating for some months now.

Even if economic sanctions from the EU and US continue to exert pressure, the recent oil price increase is an optimistic sign for the economy. However, there is little to imply that the Russian economy is witnessing a pronounced recovery. All confidence indicators are signifying considerable negativity amongst economic players. Moreover, sentiment appears to have declined in the last few months.

The extreme reliance on energy exports and lack of diversification continues to adversely impact the economy. Energy exports of Russia account for 70 percent of the total exports and around 20 percent of the GDP. Therefore, lower oil prices have made huge holes in the pockets of Finance Ministry. The reserve fund created to ease fluctuation in the oil prices is not able to make up for the developments in oil price.

The Central Bank of Russia has carried out a cautious monetary policy in the second half of 2015. It put its rate cut cycle on hold to wait and watch if inflation would decelerate in line with its forecasts. Russia’s inflation has now decelerated markedly. Inflation slowed to 7.3 percent in May as compared with November 2015’s 15 percent. Moreover, core inflation has also slowed to a similar degree. But whether the central bank’s forecast will be confirmed remains to be seen.

The CBR projects inflation rate of 6 percent for this year-end. Moreover, it expects inflation to slow to 4 percent by late 2017. However, these forecasts seem to be highly optimistic as the statistical base effects have ended, noted Commerzbank in a research report.

Meanwhile, the CBR has begun cutting rates again. It reduced the key rate in mid-June to 10.5 percent from 11 percent. There are evident conditions for additional rate cuts. Apart from the marked slowdown of inflation, the CBR has gained credibility on markets with its approach. This signifies that the measured rate cuts are not expected to exert strong pressure on the RUB, especially as real interest rates have increased markedly in recent times.

Lately, the outflow of capital from Russia has eased markedly. Last year, the country’s capital outflow amounted to just USD 58 billion, one third of the level seen in 2014. In the first quarter, the levels reached came to the lowest seen since 2007. Unlike several emerging markets, Russia does not have to be concerned regarding funding issues when the US Fed hikes rates. The country continues to record a current account surplus and is thus not reliant on capital inflows from overseas. Russia is expected to record another considerable surplus in 2017.

In all, the economic issues and raised inflation levels indicate towards additional depreciation of the ruble against the US dollar. Moreover, the oil price continues to create problems. However, ruble’s depreciation is unlikely to return to the levels seen at the beginning of 2016, according to Commerzbank.

“Neither the extreme gains recently nor the rapid losses before that are likely to continue. We therefore consider a path of continued ruble weakness to be likely,” added Commerzbank.