World Economy

WB: Russia Economy to Contract, Poverty to Rise

WB: Russia Economy to  Contract, Poverty to Rise WB: Russia Economy to  Contract, Poverty to Rise

The World Bank has cut its growth forecasts for the Russian economy, predicting it will contract 1.9% this year due to low oil prices and international sanctions, and warns of a rise in poverty.

The prediction is significantly worse than the World Bank’s last estimate of a 0.7% contraction, made in December, and the IMF’s prediction in January of a 1% contraction, AP reported.

The World Bank’s chief economist for Russia, Birgit Hansl, praised the Russian Central Bank for limiting inflation but warned of continuing pressure on government finances.

After the Russian statistical service said last month that 2015 had seen 3.1 million more Russians officially living in poverty, the World Bank said it expected this trend to continue, putting poverty back to 2007 levels.

The World Bank bases most of its projections on the Russian economy on assumptions that the economic sanctions imposed against Russia will stay in force until 2018, according to the World Bank’s updated Russia Economic Report published Wednesday. Only one scenario (baseline) implies that economic sanctions will be lifted in 2017.

“An alternative baseline scenario combines the baseline oil-price forecast with the projection assumption that economic sanctions would be lifted as early as 2017, while all other scenarios assume that economic sanctions would remain in place until 2018,” the report said.

The World Bank has predicted Russia’s annual inflation rate for 2016 will be 5.9%, a Russian macro-economist from the organization, Sergei Ulatov, said.

Russia’s Central Bank earlier predicted inflation to be at 6-7% for 2016.

  Oil to Blame

The Russian economy remained in recession after having declined by 3.8% in 4Q15 from a year ago. The figure was released by Russia’s Federal Statistics Service. The economy had contracted by a revised 2.8% and 4.5% in the first and second quarters, respectively, followed by a 3.7% contraction in 3Q15.

The latest figures showed that the Russian economy had declined by 3.7% in 2015. A country is said to have entered a technical recession if it posts a decline in two successive quarters.

One of the reasons for the Russian economy being in a recession is the decline in crude oil prices. Crude and gas exports form around 40% of Russia’s budget revenue. Thus, the sharp impact of a decline in crude oil prices is unsurprising.

This has impacted energy companies like Public Joint Stock Company Oil Company LUKOIL, PJSC Tatneft, and Public Joint Stock Company Gazprom, along with impacting the government’s revenues.

Russia’s aggressive stance against Ukraine resulted in economic sanctions being imposed on the country. Its annexation of Crimea and contribution to the conflict in Ukraine led to its economy being hurt badly in 2015. While the economy was down by 3.7%, the wholesale and retail sector contracted 10% and the construction sector declined by 7.4%.

  Countering Position  

In order to counter the ill effects of sanctions and crude oil price declines, the nation decided to let its currency, the ruble, trade freely. A sharp decline in the ruble in 2015 led to Russian exports becoming attractive, thus cushioning some of the negative impacts.

Russia’s economy minister, Alexei Ulyukayev, opined that the decline in the nation’s economic output is bottoming out. According to him, the economy is expected to post an annual rise between the second and third quarters of this year.

  Good Start

The Market Vectors Russia ETF is the most heavily traded ETF that invests in Russian equities. The fund manages $1.9 billion in assets and is invested in 32 stocks. Its total returns for 1Q16 stood at 12.9%. Around 40% of the fund’s assets are invested in stocks from the energy sector, with materials holding a distant second place with 17% exposure. The fund tracks the Market Vectors Russia Index.

Among the sectors, energy posted the highest total return in 1Q16, with Rosneft OJSC, Open Joint Stock Company Surgutneftegas, and PJSC Tatneft gaining the most in the period. Although telecom services formed only a tenth of the fund’s assets, they had the second-best total returns for the quarter, led up by Mobile TeleSystems PJSC and the sponsored ADR of VimpelCom Ltd.