Weaker oil price and ineffective monetary policy pats Russian economy

The Russian economy has entered recession on the weak oil price, the lagging effects of aggressive monetary policy, accelerated inflation, increased capital costs and falling investment in the challenging geopolitical situation. The official data, which already includes Crimea, reveals that H1 15 GDP shrank 3.4% y/y versus a 2.2% y/y fall in Q1 15. 

June demand data showed that the economy is nearing the bottom and, in our view, the bottom will be reached in Q3 15. The oil price recovery has not lasted as expected and the floating rouble has remained strong, says Danske Bank. Russia's exports shrank 26% y/y in June and imports contracted 38% y/y. Yet, peak inflation was reached in March and the dovish CBR stance has continued. However, oil price volatility, the geopolitical environment and the CBR's interventions remain sources of economic insecurity.

Russia's major macro indicators remained in negative territory over Q2 15, shrinking the most in May. Fixed investments shrank 5.4% y/y and private consumptiondived 8% y/y in H1 15, as corporations and households increased their net savings on high key rates and falling real income. 

The supply-side shock weighed on fixed investments growth over H1 15, keeping growth negative for 18 months in a row. Danske Bank states, high interest rates and limited external borrowing are seen as the main burden on fixed investment growth, regardless of numerous structural problems in the investment environment and bottlenecks in the economy. The bank expects the total 2015 outflow to exceed USD100bn as the weakening rouble creates pressure for an FX run.

According to Dnaske Bank, "We expect significant relief to come for the real economy and fixed investments when the key rate falls sharply to under 8% p.a., which we expect to happen at the earliest in 2016 as inflation again falls to single digits."