Recent data on Russian GDP growth during the first quarter of this year shows that the performance of the Russian economy continues to weaken, with GDP rising by just 0.9% year-on-year (not seasonally adjusted). This compares to a 2.0% increase in the fourth quarter of 2013. Ongoing geopolitical woes and a weakening ruble have given rise to worries about a contraction this year. These are confirmed by the seasonally adjusted GDP estimate for Q1 from the Russian Ministry of Economic Development which sees the economy contract by -0.5%.
One surprise has been the growth of industrial production during the first quarter which rose by 1.1% year-on-year. While this has been reported as positive, closer analysis reveals that this increase was primarily driven by production of goods targeted at the domestic market, such as foodstuffs and textiles. At the same time, production of Russia’s primary exports declined, with natural gas production falling by 1.4% year-on-year. This trend accelerated in April, when natural gas production fell by 6.7% year-on-year, and oil only increased by 1.6% for the same period, as international tensions heightened. Meanwhile, for Russian consumers the consistent devaluation of the ruble has meant that imports have become relatively more expensive compared to exports. This has made consumers more likely to purchase domestic products, which in turn fuels inflation.
In a bid to control further inflationary pressures, the interest rate was increased to 7.5% on April 25th. However, the inflation rate hit 7.2% in April, as figures released this morning confirm. This further increase in consumer demand is therefore worrying, as it shows the interest rate increases may have failed to achieve their objective of curtailing demand. Without a recovery of exports to support the ruble, if domestic demand continues to increase, this would further fuel inflation.
The industrial output data also highlights the structural issues in the Russian economy and the dangers of heavy reliance on exports of natural resources. Thus, the data should not be taken as proof of a reversal of fortunes in the Russian economy – structural issues will hold it back in the foreseeable future, regardless of the current crisis. A lack of diversification of economic activity, price distortions and issues within the financial sector will dampen Russia’s growth prospects. Recent geopolitical events rather than causing the current economic woes, have only exacerbated the situation.
Cebr therefore expects that the Russian economy will experience a contraction of -0.7% in 2014. However, developments in the region at large are currently subject to high levels of volatility and uncertainty. Russia’s economic troubles could also spill over into the region at large, through trade links with neighbouring countries or financial flows.
Russian real gross domestic product, annual percentage change (non-seasonally adjusted)
