Russia’s Recession Bottoms Out

Away from the gyrations of the financial markets, latest statistics appear to confirm that Russia’s economy is coming off the bottom.

Both industrial output and investment contracted by less in August than in July – and less than forecast – whilst after a brief and small upward tick caused by the August ruble fall, the trend in inflation is down again.

It is not all good news.   Retail trade turnover in August was down by 9.1% – worse than expected – whilst the fall in the ruble in August caused the Central Bank to delay its planned interest rate cut.

Nonetheless the basic story the statistics tell is of an economy that is now coming off the bottom.

Meanwhile in a time of recession the government’s budget deficit is just 3% of GDP

Perhaps the most remarkable figure of all is that aggregate foreign debt is expected to fall to $500 billion by 1st October 2015 – testament to the speed of the economy’s deleveraging. 

That the Russian economy has paid off roughly a third of its foreign debt during a period of falling oil prices without sinking into depression is a sign of its underlying strength and resilience.  With the Central Bank’s reserves now standing at $365 billion, the day when they will overtake the amount of foreign debt may not be so far off.

All this comes as the US Federal Reserve Board has once again put off a rise in interest rates, which remain essentially zero.

It is difficult in this situation to avoid making comparisons between the two economies.

Officially the rate of unemployment and the size of the budget deficit in the two economies is about the same.  However the US is supposed to be several years into its recovery, whilst Russia is in recession.

Inflation is many times higher in Russia, but is expected to fall quickly.  Russia has a trade surplus, whilst the US runs a trade deficit.

The biggest difference between the two economies is that Russia can increase its interest rates – as it did at the start of the year – to an extent that in the US now looks unimaginable.  It is imposslbe to imagine interest rates of 17% in the US, such as we saw in Russia at the start of the year, without this triggering a severe economic crisis.  Russia by contrast seems able to weather the storm.

That perhaps is as good an indication as any of which economy is in better shape.


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