In 2013 the growth rate of the Russian economy slowed down to 1,3% from the 3,5% recorded the previous year. The tendential growth of the GDP was particularly weak in the first half of the year (less than 1%), penalized by the decline in production in the agriculture, construction and utilities sectors. In the final part of 2013 there was a modest acceleration thanks to the recovery of agricultural activity and manufacturing production. On the demand side, the slowdown in the economy was due both to the drop in investments (down by 0,3% from +4,9% in 2012), after the completion of important projects in the energy sector and public works and due to the persistent weakness in the building sector, and to the slowdown in household consumption (to +4,8% from +7,6%). On this component weighed thenegative impact on disposable income of high inflation and the depreciation of the ruble. Foreign trade, on the other hand, added 0,2% to GDP in 2013, thanks to the acceleration of exports and the simultaneous slowdown in imports. In the first quarter of this year the trend growth rate of industrial production was equal to 1,2%. The sustained performance of manufacturing activity (+2,5%) more than offset the decline in public utility services (-2,1%) and the modest growth of mining activity (+0,8%), with oil up 1,3% and gas down 1,3%.
The outlook for the economy has worsened significantly with the deterioration of relations with the West due to the crisis with Ukraine. The impact of the sanctions announced so far is limited as they affect individuals and companies with little relationship with Western economies. Instead, they are intended to weigh i rate hikes implemented by the Central Bank (twice in February and April from 5,5% to 7,5%) to counter the downward pressure on the currency and the flight of private capital. Looking ahead, investments are expected to be negatively impacted by concerns about political and economic developments, by a smaller flow of capital from abroad for productive investments, the lower availability of domestic private capital and the increase in the cost of money. Furthermore, the effects of theerosion of purchasing power due to the increase in prices of imported goods due to the depreciation of the ruble, as well as more restrictive credit conditions. Recent developments have led to widespread downward revisions of growth estimates for the Russian economy compared to expectations at the beginning of the year. Second Intesa Sanpaolo, which sees a gradual easing of tensions between Russia and the West starting from the second half of 2014 thanks to an agreed political solution to the Ukraine issue after the elections scheduled for the end of May, the Russian economy could register zero growth in 2014 supported by public consumption which, together with the drop in imports, would offset the fall in investments. In 2015, a limited rebound in GDP is expected (+1%) thanks to the recovery of private consumption and exports. Investments are expected to drop both this year (-5%) and, albeit to a lesser extent (-0,5%), in 2015. Foreign trade is expected to make a positive contribution to growth in 2014 (about 1% ) thanks to the decrease in imports.
Russia's economy is heavily dependent on mining, especially the extraction and processing of oil and gas, which provide more than two-thirds of export receipts and almost 70% of tax revenues. The exploitation of mineral resources, in addition to financing both current and investment public spending, has important repercussions on other sectors, in particular services. The proceeds from the sale of raw materials have allowed the country to accumulate substantial foreign exchange reserves (560 billion dollars at the end of 2013) and to set aside significant resources in two Sovereign Funds (equal to over 170 billion at December 2013). These resources have been found to be particularly useful for emerge from the global financial crisis of 2008-09. Thanks also to the favorable cycle of raw materials, in the last decade the average growth of per capita income in Russia (+19%) was the highest among the BRIC countries (China +18,5%; Brazil +14,5% ; India +10,7%). But however, a development process heavily linked to raw materials also showed weaknesses. Strong domestic demand in the face of supply-side bottlenecks led to upward pressure on prices. Russia records higher inflation rates than major economies (11,3% average in the period 2004-08, over 6% trend at the end of 2013). And, lacking an adequate supply from domestic productions, a good part of the demand went abroad. Imports showed double-digit expansion rates, despite the good dynamics of exports of energy products, subtracting significant shares from the GDP. Various structural factors additionally limit growth potential, among them the country's low birth rate, the low capital accumulation rate, the inadequacy of infrastructures and technologies, a still widespread presence of the state in the economy, especially in key sectors such as energy and banking , which weighs on the propensity to invest in the private sector and places strong limits on competitiveness in services. Not forgetting a relatively low position in the World Bank's international rankings on the ease of doing business in the country. All these weaknesses imply one particularly low potential growth currently estimated by the Central Bank at a rate of between 2 and 2,25%.
In 2013 the state budget recorded a deficit of 0,5% of GDP while the non-oil deficit is estimated at 10,2% of GDP. The multiannual budget 2013-15 sets as a goal a balanced budget and a non-oil deficit of 8,5% in 2015. A rule has also been introduced (“Fiscal Rule”) which links public spending to the average price of oil, balancing public finances (114 dollars in 2013, 108,6 dollars in 2014 and 105,4 dollars in 2015) in order to keep the non-oil deficit more under control in favorable periods oil price dynamics. In 2013, lower-than-expected hydrocarbon revenues and lost privatization proceeds prevented new provisions to the two Sovereign Funds, the Reserve Fund (which amounted to 2014 billion in March 87) and the National Wealth Fund, which in March had a capitalization of 88 billion. Despite this, the deterioration of relations between Russia and the West on the Ukraine issue, combined with growing pessimism about the economy's prospects, has led to a substantial drop in FDI, down to 11,9 billion from 37,1 billion in the same period of 2013, and portfolio investment, which saw net disinvestments from abroad amounting to 7,5 billion from January to March). Persistent downward pressure on the currency countered by the Central Bank also contributed to capital outflows. Households bought currency and deposits for 20 billion, lenders reduced their currency exposure by another 20 billion.
In the first quarter of this year the balance of payments reported an overall deficit of 27,3 billion compared to a surplus of 4,9 billion in the same period of 2013. At the end of March, foreign exchange reserves amounted to 430 billion compared to 464 billion in the previous year. Rating agencies place Russia's foreign currency sovereign debt within the investment grade scale (BBB- for S&P's, BBB for Fitch, Baa1 for Moody's). This assessment is supported by the large current surplus, by substantial foreign exchange reserves and availability of Sovereign Wealth Funds and by the low external debt ratio. S&P's recently cut its rating from BBB to BBB-, Moody's placed its debt under review for a possible rating cut while Fitch introduced a negative outlook, due to the worsening growth prospects due to recent geopolitical developments and pressures from capital flight.
