Business Monitor Downgrades Growth Forecast For Russia

Immediate challenges to president Vladimir Putin’s third term in office are unlikely, but growing public discontent with the lack of political freedoms in Russia and the slowing economy is likely over the coming years, predicts Business Monitor International.

In its
‘Russia Business Forecast Report’
, the emerging markets analysis group says that meanwhile, the case of Aleksei Navalny has demonstrated that the potential for grassroots uprisings remains in place, despite the increasingly authoritarian measures taken by the Kremlin in recent years to suppress political opposition.

While Russia’s consumer story is expected to remain attractive over the next few years, economic growth will be lacklustre as a result of deferred investment and too much government intervention in key sectors – energy, infrastructure and banking – and declining global oil prices.

The report notes that the precarious security situation in the North Caucasus poses a major challenge for the Russian authorities, who are at risk of losing control of this vital region. The Kremlin has few good options, and will most likely maintain a combination of repression and federal subsidies, but tough security policies will create a backlash that could undermine its position further.

Major Forecast Changes

Business Monitor identifies that the rapid decline in Russia’s current account surplus in 2012 signals that the erosion of export competitiveness is occurring faster than first expected, hence their decision to revise down current account surplus forecasts. Business Monitor now expect a surplus of just 2.7% and 1.8% of gross domestic product (GDP) in 2013 and 2014, with the surplus to shift to deficit by 2017.

Although their 2013 forecast for the Russian economy was already below consensus, Business Monitor see growing headwinds hampering economic growth beyond this year. As a result, after revising the 2014 growth forecast from 3.8% to 3.5% previously, they now expect growth to slow to 2.9%.

For 2015, they have adjusted their forecast from 4.3% to 3.2%, which takes them well below consensus for both years.

Key Risk to Outlook

Business Monitor expect Russia’s central bank to cut the refinancing rate by 25 basis points, to 8.00%, by end-2013, even though inflation is likely to remain above the central bank’s target on the back of a weak rouble (RUB) keeping the import bill elevated. They believe the political pressures for more accommodative monetary policy are likely to prove overwhelming.

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