2015 GDP Forecast Raised, Inflation Outlook Lowered

The Economics Ministry has positively revised its predictions for Russia's economic outlook for 2015.

For 2015 GDP growth is now expected to grow at 1.2%, up from 1%.  Inflation is estimated to fall to 5.5%, down from the previous estimate of 6-7%.  However the ruble exchange rate is predicted to be weaker against the dollar at 37.7 from 37 previously.

The Economics Ministry did not alter its 2014 GDP outlook of 0.5%. The 2014 figure assumes a 105 dollar price of Urals Crude.  The 2015 figure assumes a fall to 100 dollars.

Capital outflow is predicted to slow to 20 billion dollars in the second half of 2014, reaching 90 billion dollars for the whole year.  This is far lower than the "200 billion dollars" claimed by Obama, a figure that now looks simply invented.

By contrast, the OECD has revised down its 2014 GDP forecasts for many of the leading Western economies on the back of weaker than expected economic growth. Italy is now expected to contract by 0.4% instead of grow by 0.5%. France is now expected to grow by 0.4% as against 0.9%.  Even expectations for Germany's growth have been downgraded from 1.9% to 1.5%. Europe is clearly less immune to the effect of sanctions than western politicans anticipated.

Brazil is however the country to compare with Russia.  Their GDPs are similar at around 2 trillion dollars.  Both have populations of around 150 million.  Both have a fairly large commodity economy.  Both are founding partners of the BRICS bank. Both have sharply depreciating currencies causing their central banks in each case to hike interest rates.

It is through this lens of currency movements and higher interest rates that the current Russian economic slowdown should be understood.  The slowdown began well before the start of the Ukrainian crisis. If one compares Russia with Brazil then it is notable that Brazil with a similar economy went into recession in the 2nd quarter of 2014 and is forecast to grow this year more slowly than Russia with growth of 0.3%. 

The main take away is that sanctions are not a major cause for slower economic growth in Russia in 2014.  Brazil with a similar economy but without sanctions has experienced an even greater slow down.  By comparison with its peers (Europe and Brazil) Russia is certainly not an outlier.