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Russia's Economy Steps Back From the Brink

 Russia's performance is leading some forecasters to be a bit more more optimistic about the depth of its recession

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This article originally appeared at Bloomberg

It's been fascinating to watch the Russian economy adjust to sharply lower oil prices. With a little help from the central bank, the country's recession might not be as bad as previously thought.

<figcaption>How much is that doggy in the window? | Photo: Yuri Kadobnov, AFP</figcaption>
How much is that doggy in the window? | Photo: Yuri Kadobnov, AFP

After an initial period in which the ruble plummeted and inflation surged - with food prices up 15.4 percent from a year earlier in December - the Russian central bank's response is turning things around. A sharp increase in short-term interest rates, currently at 14 percent, has stabilized the ruble and might even be getting consumer prices under control.

The episode has taken a toll on Russian living standards. In the first quarter of 2015, inflation-adjusted incomes were down 1.4 percent from a year earlier. Retail sales dropped 6.7 percent - and individual stores, such as the M Video electronics chain, reported even steeper declines. Imports were particularly hard hit, thanks to the impaired buying power of the ruble: In January and February, they were down 37.9 percent from a year earlier. The government's finances haven't fared well, either. Standard & Poor's predicted Friday that Russia's fiscal deficit will rise to 4.4 percent this year, higher than the 3.7 percent the government predicts.

Still, there are signs that a cheaper ruble might be helping some Russian producers compete with imports. True, industrial production was down 14.6 percent in the first quarter from a year earlier, with the garment industry - which depends heavily on imported inputs - taking the steepest plunge. Yet Russian food production was up 3.5 percent, suggesting that import substitution might not be just President Vladimir Putin's pipe dream. 

One question is whether a resurgent ruble will cut off any homegrown recovery. It's the world's best-performing currency so far this year, having gained almost 16 percent against the U.S. dollar. That said, policy makers don't want it to rise much more. Economy Minister Alexei Ulyukaev says he considers 50-odd rubles per U.S. dollar a fundamentally justified rate, and central bank governor Elvira Nabiullina said Friday that the central bank is ready to lower its key interest rate, a move that would help put a lid on the ruble's rise. 

That's exactly what analysts want. They warn that the ruble is overbought and is starting to erode the competitive advantage Russia gained through devaluation. They'd also like to see the central bank buying foreign currencies to keep the exchange rate down and bolster its reserves, which stopped falling in mid-March and stand at $354.1 billion. The bankers are clearly on the same wavelength with the regulator here: After Nabiullina's remarks, the ruble started falling, losing about 1.5 percent against the dollar.

All told, Russia's performance is leading some forecasters to be a bit more more optimistic about the depth of its recession. Standard & Poor's now predicts a 2.6 percent decline in economic output, close to what Goldman Sachs expects and lower than Bloomberg's consensus forecast of a 4.05 percent contraction. 

Despite being surprisingly tolerant of Putin's cynical policies, Russians are not going to lie down and await an economic collapse. They've learned a thing or two since the Soviet Union's collapse about how to handle crises, and no matter how loudly they complain (a national trait), these skills are not going away.

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