Country Report Russia April 2009

Outlook for 2009-10

• The ruling "tandem" between the president, Dmitry Medvedev, and the prime minister, Vladimir Putin, could face a difficult test in its efforts to contain the social and political fallout from the economic downturn.
• The atmospherics in relations between the US and Russia have improved significantly in recent weeks. It will, however, take a long time to improve the substance of relations given significant differences on a range of issues.
• The state seems increasingly wary of bailing out private companies and is now focusing on providing general help to the economy. Only a few firms can count on state aid with debt repayments.
• Real GDP is forecast to contract by 3% in 2009, reflecting sharply lower commodity prices, restricted access to external financing and reduced external demand. A recovery to 2% growth is expected in 2010.
• Lower oil prices and domestic demand will help to contain inflationary pressures, but rouble depreciation has had an inflationary impact.
• The budget and current account are forecast to shift into deficit in 2009, of 8% and 1.1% of GDP, respectively, under the impact of the economic downturn.

Monthly review

• One of the most important effects of the crisis may be cutting down to size the once all-powerful oligarchs. Few businessmen anywhere have fallen as hard or as fast recently. The crisis has reduced their wealth enormously.
• At their recent meeting in London, Mr Medvedev and the US president, Barack Obama, committed to launching ambitious arms control talks.
• The revised federal budget for 2009 entails the first deficit since 1999. The budget deficit is projected at 7.4% of officially forecast GDP. The key macroeconomic assumptions underpinning the budget are realistic.
• The central bank's policy of a managed, gradual depreciation of the rouble appears to have been successful. In recent weeks the value of the rouble has appreciated slightly against the central bank's US dollar/euro currency basket.
• The Ministry of Economic Development estimates that real GDP fell by 7% year on year in the first quarter of 2009. The annual rate of decline in industrial output decelerated to 13.2% in February from 16% in January.
• Retail sales growth turned negative (by 2.4%) in February for the first time in a decade. Rising unemployment and declining real incomes suggest that private consumption will continue to deteriorate over the next few months.
• Annual consumer price inflation rose to a five-month high of 14% in March, although month-on-month inflation slowed to 1.3% from 1.7% in February.