© Dmitry Polevoy
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The current drop in oil prices means that the country's economy is currently facing a deep recession. Hence, the IMF expects that the Russian economy will shrink by a total of 3.5% in 2015 and that the forecasted growth in 2016 will be rather anemic. Do you agree with the IMF view? Where do you see the economy of Russia heading in the short and long-term?
Our current forecast is for the recession of 3.5% up to 4% this year, but not significantly worse. Even though oil prices are indeed falling, the oil price in rubles stays relatively flat. This is important for fiscal revenues, thus, we may have a negative spillover effect via high inflation and worse confidence in case we see some signs of panic among households and corporates, which we experienced last year.
Right now we do not observe any threatening development from households and corporates, however, despite lower prices having a negative impact on the economy, it is not certain that it will go into recession much deeper than forecasted. The outlook for oil prices for the upcoming year is becoming darker, thus, we expect a very slow growth next year. In case oil prices continue their bearish trend, we may face the second year of recession, even though the scale would be more moderate than this year.
Last year, the country suffered from a massive devaluation of the Ruble against international benchmark currencies. Much of the fall was driven by the decline in oil prices, which are significant for the Russia's energy-heavy economy. Since the oil prices have fallen again, the Ruble has hit the skids as well, returning to 65.5 to the Dollar, the same territory it was in during the worst of its slide earlier this year. What other factors could determine the performance of the Ruble until the end of the year?
At the current moment, the oil price factor is dominating. Nevertheless, considering the oil price in rubles, which stays flat, the market was driven by concerns about the external debt repayments, which I expect to strengthen slightly over September to December period. Moreover, given the concerns over the fiscal growth, in the future it would probably be beneficial for the Ministry of Finance to have a relatively weak exchange rate of the Ruble. In addition, other recently appeared global factors such as China's development and more challenging economic outlook, with negative implications for oil prices along with doubts about the timing of the Fed policy tightening later this year, are also potentially affecting the Ruble.
Overall, we assume that the situation on the FX market is now better than compared to the last year. Besides, weakening of the Ruble would further depress the impulse dynamics and some other negative components of the current accounts, which could be supportive for them, and not necessarily result in lower surplus and low oil prices.
Moreover, the capital outflow is still driven by debt repayments, which I expect to be lower compared to the last year's payment, unless we have some significant global turbulence. As far as portfolio investments are concerned, we do not expect any substantial capital outflow, even though it still remains a problem, despite being more modest than it was last year.
Due to the already mentioned oil prices decline, more experts all over the world expect further depreciation of the Russian Ruble against the Greenback in September 2015. What are your forecasts for USD/RUB throughout the Q3 and the end of 2015?
At the moment, we do admit that in the short term the Ruble may remain volatile, and that potentially we may see it at even weaker levels. However, the ING base case view is that the oil prices will start to recover later this year and this will help the Ruble to appreciate from current levels to 61 in Q3 and 57.5 by the end of 2015 respectively.