The Dawn of a New Economic Era? Russia Economic Report April 2015 | - PowerPoint PPT Presentation

The Dawn of a New Economic Era? Russia Economic Report April 2015 | Edition No. 33

Main messages 1 • A steep drop in oil prices, geopolitical tensions with sanctions shocked Russia’s economy an economy already impacted by lingering structural problems. experienced two • The economy was successfully stabilized. The shocks hit the economy shocks in 2014, but late in the year. Growth was 0.6 percent. avoided a recession • Weaker Ruble and trade restrictions revived manufacturing activity. • The full effects of the two shocks will become evident in 2015 and 2 Growth prospects for likely push the Russian economy into recession. • The World Bank baseline scenario projects a contraction of 3.8 2015-2016 are percent in 2015 and a contraction of 0.3 percent in 2016. negative • Two alternative scenarios with a lower- and upper-bound oil price. 3 • The World Bank baseline outlook sees the poverty rate increasing Achievements in from 10.8 percent in 2013 to 14.2 percent in 2015 and in 2016. shared prosperity are • This would be the first significant increase since the 1998-1999 crisis under threat due to declining income and consumption and high inflation. 4 • New realities will have the potential to alter the structure of the The impact of economy and the ways Russia integrates with the rest of the world. • Strategic policies needed to balance old and new risks to the sanctions is likely to economy: (1) manage adjustment to the lower oil price and sanctions; linger for a long time (2) lessen structural growth constraints .

Russia Economic Report No. 33 1. Recent Economic Developments 2. Outlook and Risks 3. The Economic Impact of Sanctions

Recent Economic Developments: A Year of Economic Turmoil

The Tale of Two Shocks: Oil Prices and Impact of Economic Sanctions Oil Prices and Ruble Exchange Rate in 2014 120 30 110 35 100 40 90 45 80 50 70 55 60 60 50 65 40 70 Oil price Rub/USD (right hand axis)

→ High Inflation and Declining Real Wages Dampen Consumption Russia’s CPI inflation by components and Real wage growth, percent, y-o-y 15 18 16 10 14 12 5 10 8 0 6 -5 4 2 -10 0 2009 2010 2011 2012 2013 2014 2011 2012 2013 2014 2015 Nonmarket Nontradables Food Non-Food Services CPI Tradables Total

Russia’s Economy Avoided A Recession Growth composition, percent, y-o-y 15 5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -5 -15 Consumption Gross Fixed Capital Formation Change in inventories Export Import Stat error GDP growth

→ Monetary Tightening and High External Borrowing Cost Extinguish Investment Central Banks Key Policy Rate (percent) and Russia’s CDS spreads ( bps) for 5 year bonds 640 18 16 540 14 12 440 10 340 8 6 240 4 140

→ Tradable Sector Becomes Main Growth Engine Contribution to GDP Growth By Sector, y-o-y, percent of GDP 0.2 5.0 0.1 3.0 2.2 2.8 5.0 2.9 0.3 1.0 1.8 1.0 1.3 0.5 0.4 0.3 0.0 0.0 -0.2 -0.1 0.0 -1.0 -2.7 -3.0 -3.6 -5.0 -0.4 -7.0 2008 2009 2010 2011 2012 2013 2014 Tradable Non-tradable Public sector

World Bank Outlook for Russia: A Protracted Recession

Global Growth Moderately Rising Global real GDP growth, percent, y-o-y 2009 2010 2011 2012 2013 2014e 2015f 2016f 2017f World -1.8 4.3 3.1 2.4 2.5 2.6 2.9 3.2 3.2 High income -3.5 3.0 1.9 1.4 1.4 1.7 2.1 2.4 2.2 Developing countries 3.0 7.8 6.3 4.7 5.0 4.5 4.5 5.1 5.3 Euro area -4.5 2.0 1.7 -0.7 -0.4 0.9 1.4 1.7 1.6 Russia -7.8 4.5 4.3 3.4 1.3 0.6 -3.8 -0.3 2.2

Russia’s Outlook Depends on Oil Prices Growth in Global Oil Demand mb/d, year over year growth 4.00 3.00 Non-OECD, ex China 2.00 1.00 - China (1.00) OECD (2.00) (3.00) (4.00) 2007Q1 2008Q3 2010Q1 2011Q3 2013Q1 2014Q3

Russia’s Growth Outlook is Negative GDP growth, percent, y-o-y 3.4 3 2 1 1.3 0.1 0.6 0 -0.3 -1 -1.0 -2 -2.9 -3 -3.8 -4 -4.6 -5 2012 2013 2014 2015 2016 Lower-bound scenario Baseline scenario Upper-bound scenario

Real GDP Levels Fall Below 2012 Real GDP, percent, 2012=100 102 101.9 101 101.3 100 99.0 99.1 100.0 99 98.0 98 97.7 97.2 97 96 96.2 95 2011 2012 2013 2014 2015 Lower-bound scenario Baseline scenario Upper-bound scenario

Shared Prosperity Achievements At Risk Poverty and Shared Prosperity 16 0.424 15.7 15.2 0.422 15 14.8 14.2 0.420 14 14.2 0.418 13.3 12.6 13 13.0 12.7 0.416 12.7 12.5 12 0.414 11 0.412 11.2 10.7 10.8 10 0.410 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Poverty rate, % Baseline scenario Lower-bound scenario Upper-bound scenario Gini (rhs)

Is the Middle Class Still Growing? Share of the Population with Per Capita Income in US$ ppp / day 100 50 0 more than 50 USD/day 25-50 USD/day 10-25 USD/day 5-10 USD/day less than 5 USD/day more than 10 USD/day

Russia’s Investment and Productivity Challenge Gross capital formation, percent of GDP, and Total factor productivity growth 35 15 30 10 25 5 20 Percent 15 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Russia 10 -5 BRICS Average (excluding Russia) 5 EU11 Average Total Factor Productivity Resource Rich* Average -10 Capital 0 Labor 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 GDP Growth -15

How Will Russia Manage the Adjustment to Lower Oil Prices and Sanctions? Assure technology and innovation transfer, e.g. technology that can support exploration of less accessible oil and gas fields. Counterbalance restricted access to external finance, e.g. effectively invest natural resource revenues. Boost investor and consumer confidence, e.g. careful management of financial sector risks and fiscal buffers.

Special Focus Note The Economic Impact of Sanctions

The Economic Impact of Sanctions on Russia Stock market prices and trends and Exchange rate dynamics, Euro-Dollar basket 35 1900 110 40 1800 45 90 1700 50 1600 70 55 1500 60 50 1400 65 30 1300 70 1200 10 75 80 Trade volume, bln Rub (right axis) MICEX index

The Economic Impact of Sanctions on Russia Bond Issuance in US$ billion and Russia Corporate Emerging Market Bond Index for Russia 25 320 20 300 15 280 10 260 5 240 0 220 H1 2013 H1 2014 H2 2013 H2 2014

The Economic Impact of Sanctions on Russia Russia’s Food and Beverage Imports by Country: Q3, 2013 and 2014 (US$ billion ) and Russia’s Cereal Imports by Country: Q3, 2013 and 2014 (US$ billion) 0.25 1.8 1.6 0.2 1.4 1.2 0.15 1 0.8 0.1 0.6 0.4 0.05 0.2 0 0 Q3/2013 Q3/2014 Q3/2013 Q3/2014

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EXTRA SLIDES

Baseline Scenario Projections Main economic indicators 2012 2013 2014 2015 2016 105.0 104.0 97.6 53.2 56.9 Oil price (US$ per barrel, WB average) 3.4 1.3 0.6 -3.8 -0.3 GDP growth, percent 6.4 3.9 1.5 -5.3 -1.9 Consumption growth, percent 3.0 -6.6 -5.7 -15.3 1.1 Gross capital formation growth, percent 0.4 -1.3 -1.2 -3.6 -3.1 General government balance, percent of GDP 71.3 34.1 56.7 73.7 62.9 Current account (US$ billions) 3.6 1.6 3.0 6.0 4.4 percent of GDP -32.3 -56.2 -143.2 -122.1 -60.0 Capital and financial account (US$ billions) -1.6 -3.0 -7.7 -10.0 -4.2 percent of GDP 5.1 6.8 7.7 16.5 8.0 CPI inflation (average)

Upper-bound Oil Price Scenario Main economic indicators 2012 2013 2014 2015 2016 105.0 104.0 97.6 65.5 68.7 Oil price (US$ per barrel, WB average) 3.4 1.3 0.6 -2.9 0.1 GDP growth, percent 7.0 3.5 0.9 -3.0 -0.6 Consumption growth, percent 1.5 -5.6 -8.2 -10.8 1.8 Gross capital formation growth, percent 0.4 -1.3 -1.2 -2.8 -2.1 General government balance, percent of GDP 71.3 34.1 56.7 61.7 54.0 Current account (US$ billions) 3.6 1.6 3.0 4.5 3.5 percent of GDP -32.3 -62.2 -143.2 -105.5 -48.6 Capital and financial account (US$ billions) -1.6 -3.0 -7.6 -7.7 -3.1 percent of GDP 5.1 6.8 7.7 14.0 7.0 CPI inflation (average)

Lower-bound Oil Price Scenario Main economic indicators 2012 2013 2014 2015 2016 105.0 104.0 97.6 45.0 50.0 Oil price (US$ per barrel, WB average) 3.4 1.3 0.6 -4.6 -1.0 GDP growth, percent 6.4 3.9 1.5 -6.6 -2.7 Consumption growth, percent 3.0 -6.6 -5.7 -17.1 -0.4 Gross capital formation growth, percent 0.4 -1.3 -1.2 -4.5 -2.6 General government balance, percent of GDP 71.3 34.1 56.7 83.1 79.7 Current account (US$ billions) 3.6 1.6 3.0 7.1 5.8 percent of GDP -32.3 -62.2 -143.2 -130.2 -79.7 Capital and financial account (US$ billions) -1.6 -3.0 -7.6 -11.1 -5.8 percent of GDP 5.1 6.8 7.7 17.5 9.0 CPI inflation (average)

Russia’s Diverging Growth Performance Quarterly GDP growth, percent, y-o-y 12 8 4 0 -4 -8 -12 OECD Oil-exporters Russia OECD EU Emerging Other Emerging