Russia finished 2012 with a sharp slowdown, and growth is unlikely to recover soon. There are two possible roads ahead for the authorities: demand stimulation and supply side reforms. In the current environment, we believe that the former route would mainly bring problems and that it is time to deliver the latter.
Growth to bottom out in 1H13, strong rebound unlikely. The Russian economy enters 2013 on a weak note, with YoY GDP below 2.0%. While 1H13 is set to remain weak, we believe that recovery in 2H13, stemming from easier monetary policy and higher public infrastructure spending, is to be derailed by weaker oil prices in our base case scenario.
Positive side of weak growth – FY13 inflation to hit 5.4%. Running below potential growth is dragging underlying inflation lower. Although headline CPI might touch 7.0% YoY in 1Q13 on one-off factors and an unfavourable base effect, it might finish 2013 within the CBR’s CPI growth forecast of 5-6% YoY (despite expected rouble weakness after 1Q13), in our view.
Monetary easing to compensate for tight fiscal policy. With the implementation of the Budget Rule, federal government expenditures are to show only 4% YoY nominal growth in 2013, delivering tightening that opens the way for monetary policy easing. To achieve the latter, the CBR is likely, in our view, to adjust its monetary policy framework to address the collateral issue.
A downward shift in oil prices is still a key risk for Russia. In 3Q12, the breakeven oil price for the current account exceeded USD 100/bbl for the first time. Any significant downward move would put the recovery of the growth rate under threat. Most of the risks, as usual, are in 2H13 due to the seasonal CA pattern. We see the rouble reaching 37.5 vs. the basket, and 33.7 vs. the dollar by YE13.