Economic prospects remain poor, even though parts of the economy are benefiting from the rebound in oil prices since the beginning of 2009 and/or from government support. Household spending and investment are suffering from the vast withdrawal of investors and lenders in late 2008 and early 2009, deteriorating labour market conditions and poor earnings prospects. While economic conditions could force a tightening, the authorities will seek to maintain loose fiscal and monetary policies. As a result, we expect inflationary pressures to remain entrenched. Earnings from oil and gas exports and still large foreign reserves reduce external economic risk. That said, the risk of widespread default on private foreign debt has increased markedly, and renewed rouble depreciation cannot be ruled out. Real GDP was down more than 10.0% year on year (y/y) during January-August, according to initial estimates (and compared to growth of 7.4% y/y during January-August 2008). We continue to expect the economy to contract by 10.0% in 2009 as a whole and to stagnate in 2010. 

The huge change in Russia’s economic fortunes is unlikely to lead to government instability, let alone broader political instability. Less positively, neither do we expect it to spur efforts to improve the business environment and deal with grave structural economic problems; the latter include a strong dependence on oil and gas exports, low investment levels, weak product market competition and a severe demographic crisis. Some government members have acknowledged the need for action, but genuine commitment to change is still lacking. Dealing with the economic downturn and safeguarding financial stability remains the most immediate task for the authorities. The government has also pledged to continue with social security reforms (to pensions in particular), despite the difficult economic conditions. Meanwhile, Russia’s weakened economic position and a change in US foreign policy have started to make relations with the US and EU somewhat less antagonistic and more constructive than in recent years. 

Commercial risk is very high. The sharp economic and financial downturn has severely undermined business performance and greatly increased credit risk. Extensive support from the government and central bank will continue to mitigate the risk of a full-blown domestic financial crisis. However, the state of the financial sector remains a source of concern, due to currency mismatches in banks’ balance sheets, a marked increase in overdue debt and deficient regulation and supervision. The commercial environment is among the most problematic in the world, marred by weak rule of law, weak property rights protection, endemic corruption, organised crime, bureaucratic inefficiencies and harmful government interference in some sectors.