Russia recovery sputters as economy continues slog
May 22 2017 12:22 AM
An employee counts rouble banknotes at a shop in Krasnoyarsk, Russia. Encouraging investment by championing the benefits of a stronger currency is among the few options Russia has to push up growth and make up ground lost during its longest recession this century.

Bloomberg Moscow

As Russia’s economy tries to put the recession behind it, a buildup of imports at a clip last seen in 2011 might mean a longer slog ahead.
While top officials including President Vladimir Putin were counting on a stronger rouble to make foreign goods less expensive and ease the way for companies to bring in equipment and technologies, the surge of shipments from abroad can be deceiving. Instead of ringing in a boom in investment, businesses are using gains in the exchange rate to stock up inventories while pushing back plans for higher capital expenditure, according to Alfa Bank.
Encouraging investment by championing the benefits of a stronger currency is among the few options Russia has to push up growth and make up ground lost during its longest recession this century. But the authorities have little to show for their efforts so far, with gross domestic product adding only 0.5% from a year earlier last quarter after an increase of 0.3% in the previous three months.
Growth in imports, which averaged 27% in January-March, “isn’t sustainable,” according to the investment-banking arm of Russia’s biggest lender.
“The increase in imports at such a pace is a temporary phenomenon linked to rouble strengthening,” said Anton Stroutchenevski, economist at Sberbank CIB. “Import dynamics will slow.”
While growing slightly for two quarters after almost two years of contraction, the economy’s performance so far contrasts with Russia’s torrid rebounds following its previous two recessions, when growth reached 4.5% in 2010 and 6.4% in 1999. Complicating the outlook, consumer spending is failing to take off despite improving incomes and a rally in the rouble, which has appreciated more than 6% against the dollar this year.
GDP may expand no more than 1.5% in 2017 after a contraction of 0.2% last year, according to the central bank’s baseline scenario, which assumes oil at $50 a barrel. “Considering that growth and demand are still rather weak globally and at home, the economy is hardly poised for a more significant acceleration soon,” said Vladimir Tikhomirov, chief economist at BCS Financial Group, a Moscow brokerage. “Ultimately everything runs up against known constraints that have to do with structural problems and a program of reforms.”
For Sberbank CIB, Russia is moving in the “opposite direction” of what it sees as the only path to ensuring sustainable growth: a shift to an export-oriented model. While the share of machinery and equipment rose to 44% of total imports in the first two months, from 42% for the same period a year earlier, a strong rouble may be behind the “fast pick-up” across all products last quarter, not an uptick in investment, according to Alfa Bank.
The rouble’s real effective exchange rate, measured against the currencies of Russia’s major trading partners while stripping out the effects of inflation, appreciated 8.3% in the year to date through April to the highest since 2014, central bank data show.
“We believe this is simply due to companies rebuilding their inventories to take advantage of the sharp rouble exchange-rate appreciation,” said Natalia Orlova, chief economist at Alfa Bank in Moscow.
Still, the central bank is confident that the “lengthy investment pause” is already over and and estimates that capital spending had annual growth of 1% to 3% in the first quarter of 2017. It’s kept monetary policy “moderately tight” throughout the recession, bringing inflation to its 4% target months ahead of schedule. By keeping prices in check, the Bank of Russia believes it’s helping the accumulation of savings that can be a source of investment the economy needs.
At least for now, that may not be enough. In making their investment decisions, companies also have to juggle such factors as geopolitics, sanctions and next year’s presidential elections in Russia, according to Valery Mironov, deputy director of the Development Center at Moscow’s Higher School of Economics. For businesses, uncertainty is the biggest obstacle to capital spending, he said.
“It’s hard to expand investments in the conditions of such strong uncertainty,” Mironov said.
While the economy’s growth may reach about 1.8% per year in the long run, its performance is “highly dependent on the speed of the reforms process and the pace of investment,” according to Morgan Stanley.

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