Russia's Economy Improves, a Little
Russia’s economy performed better than expected in the first quarter of this year, raising hopes in that country that the recent economic crisis there might be coming to an end. However, these hopes might be misplaced as Russia’s economy faces a number of significant internal and external challenges that remain firmly in place. Externally, demand for Russia’s natural resource exports remains relatively weak and despite the recent rise in oil prices, the price of oil remains more than 55% below its mid-2014 peak. Internally, the government has few tools at its disposal to boost domestic growth, leaving Russia’s economy reliant upon natural resource exports for growth. Despite these challenges, the fact that the pace of the Russian economy’s contraction eased in the first quarter suggests that the Russian economy might just pull out of its recession before the end of this year, although post-recession growth rates are likely to be very low.
In the first quarter of this year, the Russian economy contracted by 1.2%, a much smaller contraction than anyone had expected. This was the “best” performance by the Russian economy since late 2014 and was a major improvement on the 3.8% contraction recorded last year. The main reason for this better-than-expected performance was the fact that oil prices, after falling sharply in first few weeks of this year, rebounded strongly in the latter part of the first quarter. In addition, many industrial sectors in Russia began to show signs of improvement, thanks in large part to a weak ruble, even after the ruble appreciated by 13% against the US dollar in the first quarter. Finally, while consumer demand continues to shrink at a dangerous pace (-5.4% in the first quarter) the pace of the decline in consumer spending in Russia is easing.
Looking ahead, there are some factors that are providing modest optimism for the Russian economy. First, it appears that oil prices are unlikely to plunge again in the coming months, even if they fail to rise significantly. Furthermore, the prices of other natural resources that are exported by Russia are also unlikely to fall significantly in the coming months, providing for a level of stability for the battered Russian economy. Meanwhile, it is expected that some, though not all, of the economic sanctions in place against Russia will be lifted over the course of the next 12 months, particularly many of Europe’s sanctions against Russia. Altogether, these developments suggest that the worst is over for the Russian economy and that there is now a light at the end of the tunnel as growth may now return to Russia before the end of this year.
Despite these recent improvements in the economic climate in Russia, a number of significant problems and challenges continue to face the world’s 14th largest economy. First and foremost, the government’s failure over the past 25 years to diversify the Russian economy has left the country entirely dependent upon natural resource exports, in stark contrast to more successful emerging markets in Asia and elsewhere. Second, Russia’s demographic decline is resulting in a steady fall in potential consumer spending in Russia and this demographic decline is forecast to continue in the decades ahead, leaving Russia even more dependent upon export markets. Finally, Russia faces a difficult external economic environment, with relations with key trading partners in Europe and elsewhere remaining extremely strained and with Russia failing to attract much-needed foreign investment. As a result, even after Russia’s current recession comes to an end, growth levels in Russia will remain very low for the foreseeable future.