Russia and the economic recovery

With the Russian economy facing headwinds going forward Business RT spoke with Bank of Moscow analyst Kirill Tremasov about the factors at play in the outlook.

 RT: How has Russia’s economic recovery shaped up so far?TK: “Since the peak of recession Russia has lagged on European debt concerns and US economic policy, with GDP growth still slower than much of the preceding decade – down to 4% from 7-8% over the last 10 years prior to the recession. A very moderate growth of incomes compares to inflation means that another decade is needed to see a strong economic pick-up.I expect that in the next 12 months the V shaped trajectory will remain as a form of moderate and substantial growth due to low consumer demand and weak government investment activity, while the private investment market is likely to stagnate.”RT:Russia’s economy is showing signs of slowing – what factors will determine if it picks up speed or slows down further?TK: “Economic growth relies heavily on the rate of investment activity in the private business sector which has met an uncertain environment in Russia, with political uncertainties ahead of the upcoming Russian elections, global unrest and a new wave of economic slowdown. To my mind, if the situation on the market does not change and investors remain risk averse, the country will be drawn deeper into an economic slowdown.”RT: How will the Central bank respond during 2Q and 3Q this year?TK: “I don’t see any reason for further Central bank rate increases. Money supply growth has slowed down since November 2010 on the back of central bank regulations. Banks do no longer possess excessive liquidity with the Finance Ministry borrowing intensively on the local market. Economic growth amidst Central Bank policy remains unstable along with low levels of investment and consumer activity. Thus, I believe, it is the right time for the central bank to step back and ease its stance for a while.”RT:Does the slowing economy mean that inflationary pressures will also ease?TK:“I guess so. But the annual rate will still likely to reach 10% and probably the results of the economic measures will be seen not earlier than in 2012.”RT: Will a slowing economy make it easier or harder to try and shift the economy from its reliance on commodity exports?TK:“The government has already stepped into the regulations in this filed, applying various measures and attracting more attention to different sectors, supporting alternative sectors and investment inflow.”RT:What will be the impact of the end of QE2 by the US Federal Reserve on commodity prices?TK: "It is hard to predict off hand, but I assume this will be the main issue of the second half of 2011.The outcome of QE2 will be seen later and the forecasts are very dubious thus the impact on commodities and global economy may be negative.”RT:What is the outlook for inflation, interest rates and the rouble?TK: “Summer is a time when foreign currency inflow slows down due to seasonal factors. We should expect rouble to lose points against the currency basket if oil prices remain near $120 per barrel. At the same time if the oil prices go below $90 the pressure on the rouble will force the central bank to take steps. I anticipate rates remaining stable depending on the oil price range. If the price is in the range of $90-120 there won’t be significant changes.”