The Russian economy continues to face enormous challenges of weakening external demand and continued uncertainty over the policy environment, which affects business sentiment. However, we continue to believe that the government will pursue a more business-friendly approach and seek to attract financing for major infrastructure projects, which should help to sustain a solid longerterm growth outlook for Russias economy. Attention will shift away from protesters to the make-up of the new cabinet in Russia.
While, initially, a period of power consolidation may ensue, we believe that efforts to insulate the economy from global oil price shocks and weaker demand will keep reforms high on the governments agenda. Growing spending requirements and plans to generate higher investment will see Russias fiscal position slip into a moderate deficit, while the government will accumulate a higher debt pile over the coming years.
However, this is unlikely substantially to unsettle investors, and we believe that higher spending will be evaluated more on its quality and degree of contribution to modernisation of the economy than on its size, with government debt not set to exceed 12.1% of GDP over our forecast period. A calming political environment and growing foreign investor interest in Russia will see the recent trend in large private-sector capital outflows gradually reverse over the coming quarters. In addition to higher oil prices and improving political stability, we view the domestic bond market liberalisation in early H212 as a crucial event, which could attract billions of US dollars in foreign capital inflows.
Major Forecast Changes
Our Oil & Gas team have raised our average annual Brent crude price forecast for 2012 to US$115/bbl from US$102/bbl previously. This, combined with higher private consumption and fixed investment expectations, has prompted us to upwardly revise our real GDP growth forecast for Russia in 2012 to 3.4%, from 3.2% previously. This keeps us somewhat below consensus, as we believe that weaker external demand conditions will offset the effects of higher oil prices.
Key Risk To Outlook
Russias economic outlook has become more uncertain on account of the countrys political reshuffle and the ongoing crisis in its main export market, Europe. Were political unrest to persist and government policy increasingly be characterised by presidential decrees and internal strife among the various power elites, this could see a continuation of major private-sector capital outflows, while preventing an increase in foreign investment in the years ahead.
This would force us to reconsider our current outlook on fixed investment, which we currently see as a key driver of growth. Moreover, an escalation in the eurozone cannot be ruled out, and we note that concerns over a eurozone exit by a larger member, such as Italy or Spain, as well as a major shake-up to banking-sector stability, could have serious repercussions for Russias banking sector.
A liquidity squeeze would restrict the central bank to a looser policy stance and risk stoking higher inflation, while exports would end up getting hit more than we are currently factoring in. Finally, we also caution that the hard landing scenario we are calling for in China is the third main risk factor to our growth outlook for Russia. A sharp drop in demand and a concomitant decline in global commodity prices would force a more abrupt rebalancing of the Russian economy towards the non-energy sector economy, which could foster several years of very weak economic growth.