3 Signs the Russian Economy Is Recovering
By Evan Tarver | October 22, 2015 AAA |
The price of oil, and the main driver of Russia’s economy, has declined significantly over the past 18 months. At the same time, the United States imposed sanctions on Russia in the wake of its annexation of Crimea in Ukraine. In response, Russia’s ruble decreased in value, and capital began to leave the country as citizens placed their money abroad. It seemed as if the country’s economy was spiraling downward.
However, against expectations, Russia’s economy is starting to recover. With an increase in the performance of domestic companies, rising prices for imports and a devaluation of the ruble, Russia’s economy has kickstarted itself.
Performance of Domestic Companies
The Russian stock market is one of the best-performing markets this year. According to reports, roughly 78% of Russian companies on the MICEX index have shown more revenue growth in the most recent quarter than their global peers. Russian companies are also now more profitable overall than the companies on the MSCI Emerging Markets index.
For example, Russian steelmaker Severstal recorded its highest profit margins in six years on high output. In April 2015, the company signed a contract to supply steel to the Renault-Nissan auto plant, which is expected to increase exports from Russia to the former Soviet republics, Africa and the Middle East.
Economists have been forecasting that every $10 decline in the price of crude oil reduced Russia’s gross domestic product (GDP) by roughly 2%. However, Russia’s GDP, after declining for close to 18 months, is expected to grow at roughly 3.5% per year, even without increases in oil prices.
Devaluation of the Ruble Aids Performance
The historic decrease in GDP over the past 18 months has caused Russia’s currency to lose nearly half its value against the U.S. dollar. Further declines in oil prices, which may be imminent due to Saudi Arabia’s decision to pump record amounts of crude oil, will stop the ruble from recovering in the short-term.
For companies such as Severstal, which exports roughly 30% of its steel, the devaluation is beneficial. All of the costs that go into producing Russian steel are priced in rubles. Russian company costs relative to their international competitors’ costs have decreased significantly. On the other side, any steel that Russian companies export abroad is priced in U.S. dollars or euros, both of which have strengthened in value against the ruble. When the company earns its revenue in foreign currency, it can effectively buy more rubles through the favorable exchange rates.
This benefit also applies to the country’s energy sector. Russia exports huge amounts of oil and gas to nations that use the dollar or the euro. That’s partially why Rosneft, a multinational oil producer in Russia, reported a revenue increase of 18% last year, compared to an increase of less than 1% for its international competitors.
This performance is a big reason why Russia’s tax revenue has not declined, mitigating more pain for the country’s economy. Russia’s oil output is still near record highs, however, which has caused oil prices to remain weak.
Rising Prices for Imports
In addition to the ruble helping company performance, it also increases the price of imports for Russia. This provides economic benefits in the form of domestic import substitutions that consumers purchase in lieu of the higher-priced important goods options. This allows Russians to save more, and it helps the economy increase its GDP.
A similar recovery happened in 1998, when the Asian financial crisis spread to Russia; the country defaulted on its international debt and subsequently devalued the ruble. There was an immediate negative economic response, followed by an import substitution recovery that was more successful than most economists believed. The same should happen in the current environment.
Learn to trade, practice for free with OANDA
Open a free practice account with $100,000 of virtual money. Register today! Leveraged trading is high risk. Losses can exceed investment. Advertisement
Read more: 3 Signs the Russian Economy Is Recovering http://www.investopedia.com/articles/investing/102215/3-signs-russian-economy-recovering.asp#ixzz3rUfi2qmc
Follow us: Investopedia on Facebook