World Economy

Russia Enters Its First Recession

Russia Enters Its First RecessionRussia Enters Its First Recession

Russian inflation accelerated in March to the fastest on an annual basis since 2002 even as slowing weekly readings may allow the central bank to cut borrowing costs further.

Consumer prices rose 16.9 percent from a year earlier, compared with 16.7 percent in February, the Federal Statistics Service in Moscow said in a statement. The median estimate of 20 economists was 16.8 percent, according to a Bloomberg survey. Prices gained 1.2 percent in the month.

Bank of Russia has started to ease monetary policy this year, following six increases in the benchmark rate last year, as the world’s biggest energy exporter enters its first recession since 2009. The economy has replaced inflation as the population’s top concern, according to a survey published by state-run pollster VTsIOM on March 31.

“The key message for the central bank is that monthly inflation is slowly returning to ‘more normal’ levels,” Dmitry Polevoy, chief economist for Russia and Commonwealth of Independent States at ING Groep NV in Moscow, said by e-mail. Annual inflation may climb further to about 17.5 percent and peak in the second quarter, he said.

  Prices Rise

Food products prices rose 1.6 percent in March from February, the slowest in five months, while non-food products prices increased 1.4 percent, the weakest pace in four months, according to the Federal Statistics Service’s data.

On a weekly basis, price growth is easing, stabilizing at 0.2 percent each week in March, the lowest since November.

Russia’s economic contraction will act as a brake on inflation, while the impact of last year’s ruble collapse and trade restrictions that ignited price growth will wear off this year, the central bank said in a March 13 statement.

The Russian currency, the best performer among emerging markets this year, strengthened 2.6 percent to 55.15 per dollar.

The balance of risks has shifted toward “a more significant cooling of the economy,” the central bank said March 13, after reducing the benchmark rate by 100 basis points to the current 14 percent. The economy may continue to deteriorate until the first quarter of next year, according to the Bank of Russia.

Further monetary easing is possible if inflation expectations slow, Governor Elvira Nabiullina said after last month’s rate decision. The next policy meeting is scheduled for April 30.

The March inflation data may not “stop the central bank from delivering another 100 basis-point cut on April 30,” Vladimir Osakovskiy, the chief economist for Russia at Bank of America Corp., said by e-mail.

  Economic Contraction

Russia’s economic contraction will be worse than previously thought, the World Bank said last week, the day the government reported to President Vladimir Putin that the struggling economy will recover soon.

Under its new baseline scenario, the World Bank forecasts the Russian economy will contract by 3.8% in 2015 — based on an average oil price of $53 a barrel — compared with its earlier forecast of a 0.7% contraction made in December.

The new forecast reflects the assumption that the impact of western sanctions, which were imposed gradually throughout the previous year in response to Moscow’s annexation of Crimea and its support of rebels in eastern Ukraine, will linger for a long time.

Apart from the sanctions, the impact of a recent rapid drop in prices for oil, Russia’s key export, will be more profound this year and in 2016, the World Bank said in a report titled “The Dawn of a New Economic Era?”

“The main point of this year’s forecast is that shocks of the last year, especially the oil prices shock of the last quarter of 2014, are really impacting the economy. So there is not much you can do anymore for this year,” said Birgit Hansl, the World’s Bank Lead Economist for Russia, who presented the new forecast.