Russia started the year on a positive note. While emerging markets have slowed considerably in the past few quarters, Russian real GDP growth remained resilient in 3Q11-2Q12 and stayed within the 4.5-5.0% YoY range, as the Urals price of USD 117/bbl in 1Q12 allowed internal demand to continue its aggressive expansion.
Russia is better prepared for external shocks, but is not an island. An almost flexible exchange rate regime, narrower interest rate band, improved refinancing facilities, lower FX risk and decreased share of short-term external liabilities on the balance sheets of Russian banks, companies and households highlight that Russia is now much better prepared for external shocks than in 2008. However, it is impossible for the country to be isolated from global problems. Although issues such as the deepening European banking crisis and cooling global growth are unlikely to have a substantial impact on Russia, a Urals price of below USD 95/bbl would pose a serious challenge.
Fiscal risks are exaggerated. As budget expenditures are denominated in RUB, fiscal performance is likely to surprise most analysts on the upside, as the weaker oil price will be partly compensated for by the weaker RUB. We estimate the breakeven Urals price for the budget at RUB 3,250/bbl this year (or USD 98/bbl at the moment).
BoP risks are crucial. We are particularly concerned about the current account, as its breakeven Urals price for 2H12 is USD 95/bbl.
Prepare for landing. Under our commodity team’s base case scenario of USD 97/bbl for Brent in 2H12 and 2013, we expect the Russian economy to experience a soft landing over the next nine months, with GDP growth at 3.5% and 2.0%, CPI at 7.0% and 6.2% and RUBBASKET at 37.50 and 38.75 in 2012 and 2013, respectively.