Growing risks

Growing risks  
Weak oil prices threaten any hope of a recovery in 2016. The economy is likely to see a recession for the second year running.  
Against this background, risks to the public finances, hitherto considered to be solid, have increased significantly. The government is  
unlikely to be able to contain the increase in its deficit. In 2016 this could be funded from the reserve fund. In 2017, the government  
will have no choice but to issue debt. It will therefore absolutely need to have access to international financial markets. The only good  
news comes from the balance of payments, which has improved thanks to a rising current account surplus and a reduction in net  
capital outflows.  
A second year in recession  
- Summary of forecasts  
015 2016e 2017e  
The IMF and the World Bank have downgraded their oil price  
forecasts for 2016 and also for the following five years. The IMF  
does not expect Brent Crude to return to USD 50/barrel before 2021.  
Under these circumstances, growth forecasts for Russia have also  
been scaled back. According to the estimate produced by Standard  
and Poors, the oil and gas sectors account for some 20% to 25% of  
Russian GDP. However, the recession in 2016 is likely to be less  
severe than that in 2015, before a return to growth in 2017.  
Real GDP growth (%)  
3.7 -1.8  
Inflation (CPI, year average, %)  
General Gov. balance / GDP (%)  
Public debt / GDP (%)  
15.6 9.1  
-3.7 -5.3 -4.7  
18.5 19.4 22.4  
Current account balance / GDP (%)  
External debt / GDP (%)  
32.4 37.2 34.8  
368 355 365  
Forex reserves (USD bn)  
Initial statistics for the beginning of 2016 have confirmed that the  
economy is shrinking more slowly than it did in 2015. In February  
retail sales were down just 5.9% y/y, compared to a 7% y/y fall in  
February 2015. Inflation slowed significantly to 8.1% y/y from 16.7%  
a year earlier. Alongside this, the fall in real wages was only 2.6%  
y/y, compared to 7.4% in February 2015. Nevertheless, without a  
significant acceleration in nominal wage growth, household  
consumption is likely to continue to fall in 2016.  
Forex reserves, in months of imports  
Exchange rate RUB/USD (year end)  
10.9 14.6 13.6  
73.0 89.4 97.8  
e: BNP Paribas Group Economic Research estimates and forecasts  
- Economic activity indicators  
Year-on-year, %  
 CPI  retail sales  investments  
Manufacturing production fell by only 1% in February (year-on-year),  
compared to a fall of 2.8% a year earlier. Indeed, production of  
machine tools, water, gas and electricity increased. At the same  
time, mining output remained strong, as did agricultural production.  
However, without a real turnaround in company investment (down  
6.7% y/y in December) growth will struggle to return. Despite rising  
profits, lending to companies continues to fall. Monetary policy is not  
sufficiently accommodating to encourage companies to invest.  
Under the current conditions of pressure on oil prices and thus on  
the rouble, any cut in key interest rates looks unlikely. Thus there is  
not much room for monetary policy to come to the aid of economic  
activity, despite an easing of inflationary pressure.  
2008 2009 2010 2011 2012 2013 2014 2015 2016  
Source : Rosstat.  
Growing threat to public finances  
The government also lacks scope to boost growth. Falling oil prices  
from USD 53/barrel to USD 37/barrel) are likely to reduce revenues  
and that of other public sector bodies from the reserve fund, which  
stood at USD 49 billion in February. Although the fall in the dollar  
will increase the government’s room for manoeuvre (in terms of both  
receipts and the valuation of the fund, which is 40% invested in  
euros and 44% in dollars), the situation could quickly become critical.  
The fund will be exhausted by 2017. The wealth fund (the other  
sovereign fund) is likely to have only USD 40 billion to  
USD 46 billion (after the recapitalisation of the banks and  
Vnesheconombank). The government will then have no choice but  
to issue debt. At present, liquidity in the domestic market is  
from hydrocarbons by nearly 22%, assuming that the fall in the  
rouble (estimated at 15%) offsets some of the reduction in revenues  
in dollar terms. To contain the fiscal pressure, the Ministry of  
Finance has already indicated that several measures could be  
introduced (increases in extraction taxes, a privatisation programme,  
increases in the dividends paid by state-owned companies, etc.).  
However, despite these measures, federal government receipts  
could fall from 17.1% of GDP in 2015 to 13.8% in 2016, resulting in  
the deficit growing from 2.4% of GDP in 2015 to 4.1% in 2016. So  
far, the government has planned to finance virtually its entire deficit  
2nd quarter 2016  
Significant need to recapitalise the banking sector  
- Sovereign funds (USD bn)  
National Wealth Fund  Reserve Fund  
The financial position of the banks worsened significantly in 2015.  
Profits declined by more than 67% due in particular to the sharp rise  
in provisions to cover the increase in non-performing loans and  
those considered at risk (which according to ratings agency  
Standard & Poors account for more than 17% of loans). The overall  
solvency ratio of the whole banking sector was only 8.5% in  
December 2015, whereas it was 13.2% five years ago. S&P  
estimate that the banks require recapitalisation of between 850  
billion and 1,300 billion roubles, whilst the recapitalisation of  
Vnesheconombank could require an additional 1,000 billion roubles.  
Improvement in external accounts in 2015  
Despite the sharp fall in oil prices (-49%), Russia’s external  
accounts improved in 2015. The balance of payments showed a  
small surplus that led to an increase in currency reserves of USD1.3  
billion, following a fall of USD 107.5 billion in 2014. This  
improvement came from the increase in the current account surplus,  
which reached 5% of GDP, having been limited to 3.1% of GDP in  
2008 2009 2010 2011 2012 2013 2014 2015 2016  
Source : Banque centrale de Russie.  
External debt remains manageable  
At the end of 2015, total external debt was USD 515 billion  
The increase in the current account surplus (USD 7.3 billion) was  
due to the fall in the trade deficit coupled with a slight fall in the  
balance of payments (due particularly to a reduction in interest  
payments on debt). The trade deficit was USD 44.1 billion lower,  
despite the sharp contraction in exports of oil and gas (-42.1%), as  
well as other exports (-18%). These effects were counteracted by  
the reduction in imports of more than 37% (due to the economic  
contraction on the one hand and the embargo on food products on  
the other).  
USD 385 billion excluding commitments to foreign direct investors),  
from USD 599 billion at and 2014. The federal government and the  
banks reduced their debt by 26% and 33% respectively, whilst  
company debt fell more modestly (9%). Thus external debt for  
banks and companies was USD 473 billion at end-2015, and private  
debt USD 260 billion at end-September 2015. For private banks,  
nearly 86% of their external debt consists of currency deposits, but  
outflows were extremely limited over 2015 as a whole. For  
companies, if one excludes commitments to foreign direct investors,  
debt is only USD 129.5 billion.  
Russian companies were unable to take advantage of the weakness  
of the rouble to increase their market share, due to a lack of  
competitiveness. At the same time, the deficit on the financial  
account was only 4.7% of GDP in 2015, from 7% in 2014. Net  
outflows of private capital slowed to USD 56.9 billion, from  
USD 153 billion in 2014. This reflected the repayment of private  
sector debt. It did not relate to the sale of Russian assets or the  
purchase of foreign assets.  
The central bank estimates that external debt servicing costs will be  
some USD 100 billion in 2016 (from USD 155 billion in 2015). Debt  
servicing costs for banks and companies are estimated at  
USD 24 billion and USD 71 billion respectively. However, these  
amounts remain manageable and tensions have been reduced  
significantly, as judged by foreign currency liquidity injections from  
the central bank. The levels of currency repo operations have fallen  
substantially over the last year. This has taken them from around  
USD 35 billion per day a year ago to some USD 18 billion at the end  
of March.  
The fall in the country’s net foreign currency commitments enabled it  
to consolidate the net external position, which had a credit balance  
of more than USD 300 billion at end-2015. The risk of a balance of  
payments crisis in Russia is therefore very low. But what of the risk  
of a default on external private debt?  
2nd quarter 2016  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
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