Thursday, August 28, 2014

28/8/2014: The State of Russian Economy

I published a lengthy note summarising my view of the state of Russian economy on the LongRun Economics Blog:

The post looks at:

  • Russian GDP growth
  • State of Russian foreign reserves
  • Central Bank policy interventions
  • Capital outflows
  • Funding situation for Russian banks and corporates
  • Russia's external balance
  • Federal Government finances
  • Problems with imports substitution 
The summary is:

Russian economy is showing signs of stress, both in structural terms and in terms of the fallout from the Ukraine crisis.

In structural terms, reforms of 2004-2007 period now appear to be firmly shelved and are unlikely to be revived until the sanctions are lifted and some sort of trade and investment normalization takes place. Structural weaknesses will, therefore, remain in place.

In dealing with the crisis fallout, even if Russia were to switch to self-sufficiency in food production and tech supplies for defense sector and oil & gas sector, as well as re-gear its corporate borrowings toward Asia-Pacific markets, the reduced efficiencies due to curtailed trade and specialisation are likely to weigh on the economy. There is absolutely no gain to be had from switching the economy toward an autarky.

Politics aside, it is imperative from economic point of view that Russia starts to make active steps to disentangle itself from Ukrainian crisis. Rebuilding trade and investment relations with the West and Ukraine – both very important objectives for the medium term for Russia – will take a long, long time. It’s best to hit the road sooner than later.

Please note: this is not a note designed to deal with geopolitical crisis unfolding in Ukraine or Russia's role in the crisis. Here, I deal with economics.

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