Are We There Yet?

It is just over two years since Russia was whacked with sectoral sanctions and the start of a steep oil price collapse. That double-whammy hit soon pushed the rouble into free fall and the economy into recession. Ignoring the chaotic and unreliable 1990s, this is the country’s longest period of economic decline and the longest period without a clear path to a return to strong growth in sight. Against that backdrop this is a good time to look at the main issues which affect our lives as expats in Russia, to look forward through the coming winter and ask the question ‘will life be better or worse next spring?’

Most people will again have experienced a polarized view of Russia while travelling in the summer; in Moscow the view of politicians and many other observers is that the country is now past the worst and recovery is coming, albeit more slowly than was the case in 2009. That contrasts with the view widely held by western commentators which is that the current recovery trend is unsustainable and Russia is simply in the eye of a nasty storm which will return with destructive force. Which view is right? Let’s put that to one side for a moment. Instead it is fair to say that for the majority of those who have a firmly held positive or negative view of Russia’s future do so because of an ingrained bias rather than a conclusive analysis of the facts. There are simply far too many variables, which will impact the country over the next two years, to be that certain.

To express a very clear view, either way, of where the economy and the country will be in the autumn of 2018 requires the deployment of a combination of guesstimates to be made today. For business and individuals the best course, as always in such situations, is to plan for different scenarios and to stay flexible; to be aware of what lies behind the headlines and the numbers and neither be blindly optimistic nor pessimistic. Pragmatic is a safer stance today and will very likely remain so over the next two years.

More immediately, what should we pay attention to through the coming winter as a possible guide to the years ahead?

Near the top of all expats concerns is the rouble exchange rate and where it is heading. For those paid in roubles the concerns are clear, especially if one has foreign currency obligations, while even those in the relatively more comfortable position of being paid in a foreign currency are affected. One example is that the exchange rate has a direct impact on the cost of living in Russia. Another is that the assessment of where the rouble exchange rate may trade in the years ahead is one of the key considerations for foreign companies deciding on whether to increase manufacturing and services in Russia. That has very clear implications for jobs and expat remuneration.

As to where the rouble may trade over the winter and over the next two years? That depends on the oil price and also on whether the Central Bank (CBR) sticks to a policy of maintaining a competitive currency. The former is out of Moscow’s control. It has made clear that, despite the talk of a coordinated production freeze with some OPEC countries (which cannot happen so long as Iran and Saudi Arabia are at loggerheads), Russia will not be part of a price control mechanism. It is a case of pump at maximum and leave the price to others. In this case the ‘others’ include US shale producers and the various countries dealing with variable production due to acts of war or economic and technical constraints. Most likely the oil price will stay in the $45 to $55 p/bbl range and that implies a rouble-dollar exchange rate not straying too far off the mid-60s.

Medium to longer term the oil price should recover, as supply-demand equilibrium is reached in mid-2017 (barring any extreme disruptions or peace in Libya) and then we will see if the government’s promise of maintaining a competitive rouble, i.e. no higher than high 50s against the dollar, is current opportunism or a real commitment.

The second variable is sanctions. Nobody expects Crimea sanctions to be eased, probably ever, while the oil and technology sanctions are more of an inconvenience than serious over the medium term. The focus is entirely on financial sector sanctions. These have been the most damaging for the economy because of the voluntary actions by many western companies and financial institutions to place a near total block on all Russia risk. US sanctions against Iran and the billion dollar fines against big EU banks have created a legacy of fear of any financial sanctions disproportionately larger than the actual sanctions.
But here also the view of what happens and when is quite different in many EU capitals than in Washington. The extension of EU sanctions by only six months and the open opposition to indefinitely continuing sanctions by many senior politicians across Europe does offer a reason for optimism that we may see the start of the so-called staged reduction from next February. That will be positive and should help reduce some of the voluntary restrictions also. But there is no evidence that the U.S. Administration is close to considering such a move. That of course may change relatively quickly under the new Administration and will depend not only on whether there is a Republican or Democrat in the White House but also whether the staunchly anti-Russia Republican Party retains control of Congress. More variables.

Then there is the effect of domestic confidence. For the past twelve months, consumer confidence has been near record lows and coming into the summer there was no evidence of any improvement. In practical terms that can be seen in the still declining retail sales and demand for consumer and household services. Recent surveys show that while support for the President and Prime Minister remains high, people are not buying the optimism about a return to strong growth. Confidence about the direction of the country and the economy has been sliding for months.

There should be some pickup in consumer activity in 2017 as the economy returns to modest growth of approximately 1.5% (Macro-Advisory estimate) and as the government cranks up the positives ahead of the March 2018 presidential election. But, as I have written in previous articles, a return to job-creating and confidence boosting growth is still some way off and will only happen with greater effectiveness from government. Planning for what will be a tight-balancing act in the pre-election campaign is undoubtedly one of the several reasons for the senior administration and government agency personnel changes seen in recent months.

What it boils down to is that there is every reason to be hopeful that the economy will be relatively stable, even returning to modest growth, over the winter. The eye of the storm pessimists will be disappointed. But that is still a long way from delivering the scenario favoured by the optimists. That is still a long slog away.