Russian economy seen contracting in 2016 on lower oil price response

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Fresh fiscal cuts show Russia’s response to lower oil prices has not halted, Fitch Ratings said.

It said the authorities’ commitment to their policy framework has moderated the oil shock’s impact on Russia’s sovereign balance sheet, but tighter fiscal and monetary stances compared to our previous expectations are an additional drag on growth.

Fitch forecast the Russian economy to contract again in 2016.

“The government has asked ministries to identify RUB700bn (USD9bn) of cuts, which would reduce discretionary spending by 10% from October’s 2016 budget. Wages and pensions are ring-fenced. The government now assumes oil averaging USD40/b this year, against USD50/b in the budget. The cuts, worth around 0.9% of GDP, would keep the deficit below 3% of GDP, in line with the government’s target,” Fitch said in a statement.

But it added that fiscal tightening will dent demand in an economy weakened by lower oil prices and rouble volatility. “The Federal Statistics Service’s preliminary 2015 estimate showed GDP contracting 3.7 percent. We have revised our real GDP forecast for 2016 to a 1 percent contraction from 0.5 percent growth to reflect 2015 outturns, lower oil prices and the impact of the latest cuts. If oil prices do not start to recover in 2016, tax increases for the oil sector would become more likely, further reducing capex.”
 

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