RenCap thinks Russian economy will shrink 0.6% in 2016

Russian investment bank Renaissance Capital says in a revised forecast that Russia’s economy is likely to shrink by 0.6% in 2016.

“[We] see no chance for growth to turn positive this year at low oil prices. We think growth could exceed 1% in 2017 at a flat oil price, or look better at stronger oil,” Oleg Kouzmin, RenCap’s macro analyst for Russia and the Commonwealth of Independent States, says in a report.

The Moscow-headquartered bank expects oil to go up in price significantly in 2016. Its base-case forecast is $45 per barrel.

With oil cheaper than $40, Russia will face “another year of adjustment”, while a price approaching $50 could bring about stabilisation in the country, Kouzmin says.

A price of around $45 would put Russia “between the good and the ugly scenarios” with the rouble possibly averaging 65 to the dollar because of an anticipated continued decline in capital flight, he argues.

But even with $45 oil, Russia would quite likely have a budget deficit of 3% of GDP because of announced austerity measures, according to RenCap.

With oil wobbling around $30, an injection of up to 1.9 trillion roubles ($23bn if the rouble sinks to 82 to the dollar, which the Russian currency is expected to do if oil stays around that price level), would be needed to keep the budget deficit down to 3%.

If oil went to $40 and the rouble climbed to 71 per dollar, the treasury would still need a big input, more than 700bn roubles ($9.9bn) that has been projected for this scenario, Kouzmin says.

“In all these cases, we see a high probability of further spending cuts and higher taxation for extraction industries,” he says.

The central bank could cut the key rate to 9% by the end of 2016 if oil goes up to $45 or keep it at 11% with $30 oil, the analyst says.

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