With oil prices consistently below $40 per barrel, many people assume that the Russian economy must be in shambles, but Russia’s equity and bond market performance surprised many investors in 2015. For example, Russia’s stock market (AMEX:RBL) is up 1.32% year-to-date compared to the S&P500, which is down 2.26%. Reuters reports that Russian USD corporate debt is among the world’s best performing assets this year, returning 26% on the JPMorgan Corporate Emerging Market Bond (CEMBI) index. This performance comes despite the price of oil, seen as an important source of Russian economic activity and income, being down nearly 50% year-to-date.

2015 was indeed a tough year for Russia. The World Bank wrote in its September Russia Economic Report that “Low oil and gas prices, geopolitical tensions and ongoing international sanctions deepened Russia's recession in the first half of 2015. A significant increase in the poverty rate decreased consumer demand and a sharp contraction in real wages has had a severe impact on households.” The second half of 2015 has been a period of relative stability for Russia, and there are signs that things may have stopped getting worse. This led Moody’s, a credit rating company, to revise Russia's government debt rating outlook to stable in December.

Investors seem to be warming to Russia. Arnab Das, head of EM macro at Invesco, talked with Bloomberg’s Francine Lacqua on Dec. 11 about the factors impacting Russia's economy. She started the interview saying, “2015 was tough … but 2016 is going to be even tougher for Russia.” It is not clear that Mr. Das agreed with this statement because he didn’t immediately reinforce it. Instead, he said, “the macro policy [of Russia] makes a lot more sense than it has in quite some time.” He went on to say that Invesco sees Russia “bottoming out” in 2016.

Oversimplifying the link between the oil price and the performance of the Russian economy ignores the finance authorities’ policy response that has stabilized the economy. This response paved the way for the “bottoming out” of the economy that Mr. Das referenced, and is part of the reason the International Monetary Fund (IMF) and World Bank forecast a return of economic growth in 2017. Nonetheless, some investors are still avoiding Russia. For example, Timothy Ash, head of CEEMEA strategy at Nomura, a Japanese bank, said in a Bloomberg interview on Dec. 11, 2015, “We are long-term bears on Russia because oil prices will be low for an extended period of time.”

Moody’s Outlook Now Stable

Despite mixed expectations about Russia’s economy in the mind of some investors, Moody’s took the unexpected step at the beginning of December to revise Russia’s sovereign debt outlook to stable from negative. Moody’s downgraded Russia’s credit rating and assigned a negative outlook to the country in February 2015. (For more information see, Russia’s Creditworthiness and Investment Risks.)

To explain the outlook change, Moody’s specifically cited the stabilization of Russia’s external finances that helped mitigate the effect of the fall in oil prices on foreign currency reserves and the diminished likelihood of the Russian economy facing an intense shock in the next 12-18 months. Specifically, they cite reduced tensions with Ukraine that may prevent new economic sanctions from being imposed on the country. According to Moody’s, tensions in the region have lessened, and local elections are scheduled to take place in the contested regions [of Ukraine] early in 2016 after being held elsewhere in the country in October.

Additionally, Russia is in negotiations with Ukraine over the fate of a USD 3 billion bond that is due to be repaid on Dec. 20, 2015. Russia is insisting on payment in full, having refused to participate in a USD 18 billion debt restructuring that resulted in a 20% principal write-down for Ukraine’s other creditors, according to Bloomberg News. (For more see, How Ukraine's Debt Crisis Affects The European Union.) An amicable debt resolution would be an additional positive sign.

Moody’s is still relatively cautious about the pace of economic improvement, however. They go on to say in their press release that they “expect Russia’s growth will remain modest even when the economy starts to recover. The economy’s potential growth rate is estimated at only 1% to 1.5%, constrained by declining oil output capacity, underinvestment, fiscal consolidation, and highly indebted households.”

Economic Forecasts Revised

Others are beginning to see a turnaround in Russia’s economy. Economic forecasts from the IMF, World Bank and Standard and Poor’s all predict a return to growth by 2017.

Russian Economic Growth Forecasts (% GDP Growth)


World Bank














Source: IMF, World Bank, S&P

The Russian Economy Minister, Alexei Ulyukayev, says Russia should start growing much earlier. He forecasts 0.7% growth in the second quarter of 2016, according to Dow Jones Newswire.

If this prediction is realized, it will go a long way to meeting Russian President Putin’s goal of restoring economic growth by 2016. During an annual televised phone-in on April 16, 2015, Putin did his best to convince his fellow citizens that the worst of the recent economic crisis was over. (For more see, Putin Says Russian Economy Healing - Is He Right?)

According to the Dow Jones Newswire, economists generally say that the Russian economy may expand next year. The news service goes on to say that the World Bank and IMF have said that in order to return to sound growth, Russia needs to proceed with economic overhauls and become less heavily dependent on oil and gas exports.

Foreign Direct Investment

Russia is already making progress at improving its business climate, despite the common misconception to the contrary. For example, in the Invesco interview mentioned earlier, Mr. Das says “the structural issues, the business environment [in Russia], these things are not improving.”

This statement runs counter to the World Bank’s 2016 Ease of Doing Business in Russia report published in October 2015 where the bank reports that Russia moved up 3 places and now ranks 51st out of 189 measured economies, which “confirms the positive tendency of the past 4 years where Russia maintained a strong reform momentum and leads the BRICS bloc by a large margin,” states the World Bank.

The Bottom Line

Russia’s economy has not been hit as hard as many anticipated when tensions with Ukraine resulted in US/EU economic sanctions and oil prices started their long journey down from $100 per barrel at the end of 2014. A year later, credit rating agencies like Moody’s are having second thoughts, revising their outlook back to stable. The Russian government has implemented sound fiscal and monetary policies that have helped to contain the crisis and preserve much needed foreign exchange reserves. If tensions with Ukraine don’t worsen in the meantime, and oil prices stabilize, then the Russian could indeed be healing much quicker than anyone expects.

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