22 June 2018

Russia: What are the economic prospects?

With a surface area four times that of the European Union and a GDP equivalent to 3 times that of Belgium, Russia is a major political power, but also a significant economic partner for Belgium.

While Russian economic growth has been impacted in recent years by Western sanctions and falling oil prices, triggering a recession between 2014 and 2016, the outlook for 2018 and 2019 is moderately optimistic and GDP growth could settle at 2% in 2018.

With a surface area of nearly 17.1 million square kilometres (almost four times the size of the European Union), Russia is the largest country on the planet. Economically, the situation is different. This is due in particular to a very low population density: there are "barely" 147 million inhabitants, the equivalent of the population of France and Germany combined.

In terms of economic activity, Russia’s GDP reached 91.650 billion roubles in 2017, which at the exchange rate of the time, amounts to EUR 1.356 billion. This places Russian GDP between that of Spain and Italy, or a little more than 3 times that of Belgium. However, if we correct these figures to take into account the lower price levels (using purchasing power parity), Russia’s economic activity corresponds to that of Germany.

Sector focus

The Russian economy is obviously dominated by the oil, gas and, more generally, the energy sectors. At the beginning of this year, oil production reached 10.5 million barrels a day, or 12.9% of world production. Gas production is about 60 million cubic meters each month. The energy sector is also crucial for Russian public finances, since it is the source of more than half of the state's revenues. This also explains why changes in economic growth, public finances and the rouble exchange rate depend on oil prices.

Moderately optimistic prospects
"We expect the Russian economy to grow by 2% in 2018"

After a period of recession between 2014 and 2016, the Russian economy is back on track since 2017. For 2018, the rise in oil prices and the good level of PMI indicators allow us to consider a relatively optimistic scenario.

GDP rose by 1.3% year-on-year during the first quarter of 2018. For the whole of 2018 we project 2% growth, even though there are certain risk such as the impact of new tensions and the performance of the rouble. 

Household consumption is expected to contribute to growth as real wages are rising, mainly as a result of rising public wages and consumer confidence at a level last seen in the beginning of 2014.

In addition, consumer price inflation remained stable during the last 3 months at 2.4%, after hitting a low of 2.2% at the beginning of the year. Inflation thus remains historically low and far from the central bank's target of 4%, but the depreciation of the rouble could increase the price of imported goods.

Charlotte de Montpellier, economist at ING Belgique analyzes the specific aspects of the Russian economy in video.

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