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Knights of the Vine RUSSIA


Russian Economy Still Mired in Recession
Text by Matthew Partridge

As with the past two months, there are some positive signs. Urals oils continues to trade above $50, closing at $55.35 in the week ending May 15. The manufacturing and service sector PMI continue to improve, rising to 43.4 and 44.4 in the case of manufacturing and services respectively in April. The Central Bank of Russia has also started to loosen monetary policy, cutting the refinancing rate from 13% to 12.5%, and then a fortnight later to 12%. At the same time both the currency and ruble reserves continue to hold steady.

However, these mildly positive signs should not be mistaken for a recovery. Unless there is a catastrophic geopolitical event that disrupts the supply of oil (which is admittedly not outside the realm of possibility), oil is unlikely to rise any further, and could in fact fall back somewhat. Although the data from both PMI surveys look more solid, the balance is still strongly negative, indicating that the economy is merely contracting at a slower rate rather than increasing. Indeed, at 43.4 the manufacturing PMI is only above the level it was at the epicenter of the 1998 crisis.

Most importantly, after rising in February the money supply fell again. It has fallen in six out of the last seven months and is nearly 13% down from its peak last August and contracting at a six-month annualized rate of 22.4%. Given that a rate of monetary expansion of between 15 and 25% is needed to maintain trend growth and the infl ation target, the CBR needs to cut rates more drastically and embark on quantitative easing. A looser monetary policy will mean that the ruble will have to fall again, bringing to an end the brief period of relative stability that it has been experiencing since the middle of February.

Russia seems to be at a crossroads. The worldwide depression that many feared only a few months ago, now seems unlikely. Indeed, a return to positive economic growth in the world’s major economies seems likely in the next few months, although it will take some time before a return to trend. Similarly, crude oil has bounced back. However, Russia can neither rely on a return to the oil prices of even eighteen months ago nor can it coast along on the coattails of the global economy. Those looking to put money in the stock market should hold off until more decisive action is taken by the monetary authorities.

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