Russian GDP returned to growth in 2017 (+1,5%) after two years of contraction and the recovery is set to continue during the two-year period 2018-2019, mainly thanks to the rebound in oil prices and increased demand internal. However, structural weaknesses and the negative impact of sanctions on productivity and investment continue to weigh. The main short-term downside risks to the growth outlook are exchange rate volatility and rising inflation as a result of geopolitical tensions: in August, the US imposed further sanctions, including the ban on the export of security-sensitive goods and technologies to Russia, while further restrictive measures from a commercial perspective are in the offing. atradius it expects private consumption growth to remain robust in the coming months, driven by higher consumer confidence and a lower inflation rate capable of boosting real disposable income. Russia has seen a steady decline in consumer price inflation since late 2015, allowing the central bank to cut its core rate several times to 7,25%. Further growth-supporting monetary easing is expected in the medium term. Despite this, real growth in fixed investments is expected to remain contained this year due to the high level of perceived risk, bureaucratic inefficiencies and the weak institutional context.
Since last year the Russian banking sector has begun a slow recovery, however the launch of new sanctions aimed mainly at Russian oligarchs, their companies and ability to do business threatens to inhibit the recovery, generating uncertainty and lower investments. Therefore, the restrictive measures launched by the EU and the US could have a very significant impact in the medium and long term on the refinancing capacity of the main national companies and banks. In this scenario the Central Bank it allows the ruble to fluctuate, on the one hand depreciating and generating inflation, but at the same time also acting as a shock absorber for the current account, expected to remain positive in the two-year period 2018-2019.
It should also be noted that Russian economic policy during the previous recession was rather cautious: despite the public debt of about 12% of GDP and the pressure of low oil prices on the budget, the public deficit was kept within acceptable margins. Hence, in order to support higher social spending in the coming years, the government plans to increase the value added tax from 18% to 20% starting from January 2019 and has already raised the retirement age. The executive has confirmed the goal of balancing the budget by 2020, using a fixed oil price of 40 dollars a barrel: any extra revenue generated by a higher oil price can be used to intervene in the currency market and to generate additional foreign exchange reserves, in order to be able to loosen the dependence on international loans and pursue a more independent economic policy.
Despite the ongoing economic rebound, long-term prospects for higher and sustainable growth rates remain subdued, analysts say, as structural weaknesses and the negative impact of sanctions on productivity and investment will continue to weigh on growth. The Russian business climate is still stagnant on property rights, weak infrastructure and lack of competition in markets. The authorities seem to have not yet managed to seize the opportunity to strengthen the country's economic structure and thus improve the non-hydrocarbon sector by investing in other sectors to diversify the economy from the dominant sector. There is an underlying investment deterrent, which is badly needed to modernize the energy sector and help diversify the economy: even before the outbreak of the Ukrainian crisis, the level of investment was too low and FDI was too limited due to a hostile economic climate and state control over large swathes of the economy. And it is precisely this weakness that is the target of latest international sanctions imposed by the EU and the US which aim to prevent technology transfers and financing of Russian companies, particularly in critical sectors such as energy and armaments.
