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Russian revival unravelled?

Russia has started to emerge gingerly from recession but don’t bank on it lasting

Russia’s economy has withstood a combination of low energy prices and sanctions and may soon emerge from the deepest contraction of President Vladimir Putin’s 16-year reign. Without a sudden oil-price surge, though, few signs point to much of a sustainable rebound.

While the IMF predicts Russia’s GDP will return to growth in 2017, expanding by 1%, Putin himself has warned that the economy will stagnate near zero if no new sources of economic activity are found.

Russia earns about half of its revenue from crude and natural gas and benefitted from the recovery in oil markets in the first half of the year. And while Brent soldiered toward $50 in mid-August, lows at the beginning of the third quarter are likely to be felt in Russia in the coming months. Ultimately, Putin’s failure to diversify the economy away from its heavy reliance on oil remains the country’s fatal flaw.

The devaluation of the ruble has boosted export-oriented companies like oil and gas producers but firms concentrated on the domestic economy and those relying on expensive imports have suffered. Retail turnover continued to shrink, dropping by 6% in June compared with a year earlier, despite a 9% nominal rise in wages. Consumer confidence is also picking up from a low level, but it’s premature to see it translating into a wider expansion of retail sales.

Wake-up call

Business needs a shot in the arm to kick start investment, but the Central Bank kept interest rates on hold at 10.5% on 28 July, so the cost of capital is still high. Inflation has plateaued at 7.3% in the past four months, which justified the decision not to cut.

Genuine market reforms have yet to be seriously considered while the revived privatisation programme is in danger of turning into a farce if state-controlled Rosneft is allowed to buy state-controlled Bashneft.

The finance ministry is getting worried, and says the government’s Reserve Fund, a low-yield sovereign-wealth fund designed for use in periods of weak oil and gas revenue, will be depleted by end-2017 without changes. The government has been relying on the $38bn fund for spending—but it may soon be forced to tap its second rainy-day fund, the $72.2bn National Welfare Fund.

With the weak economic recovery in the backdrop, the Kremlin is getting primed for parliamentary elections in September by squeezing the political opposition and tightening control of independent media. Journalists are now afraid of being locked up for posting comments on Facebook as well as having to adhere to new “Big Brother” legislation, a package of repressive measures reminiscent of Soviet-era surveillance.

Putin wants to choke off any dissent after alleged ballot-rigging in the last Duma elections, in late 2011, led to hundreds of thousands of protestors taking to the streets in the biggest anti-government protests since the collapse of the Soviet Union.

Key to a turnaround in Russia’s economic fortunes is whether sanctions could be lifted or their interpretation eased within the next six months. Russian companies have largely been frozen out of international capital markets for the past two years, starving them of the kind of stimulus that helped get the economy moving again after the last recession, in 2009.

Sanctions were imposed on Russia by the US and the EU in 2014 after Putin annexed Crimea. Russia then responded with its own sanctions. The spat drove Russia’s economy deep into recession. GDP sank as much as 4.5% in the second quarter of 2015.

“One of the biggest issues with the sanctions is the perception that Russia is a dangerous place in which to invest or conduct business,” says Chris Weafer, founder of Marco Advisory, a Russia-focused consultancy. “These voluntary sanctions have been just as damaging to the economy and are a serious impediment to recovery.”

Putin and his foreign minister Sergei Lavrov have in recent months intensified efforts to convince government officials from EU countries in Southern and Eastern Europe to ease sanctions. Their efforts are beginning to pay. Government representatives from Italy, France, Hungary, Cyprus and Slovenia have all recently talked of a staged reduction of sectoral sanctions.

The main advocate for renewing sanctions is the German chancellor Angela Merkel. But she will wait to take her lead from whomever ends up in the Oval office in November.

If Hillary Clinton triumphs, her Democratic administration would be in no mood to do any favours for Putin, especially following allegations of Russian interference in the US electoral process.

A victory for Donald Trump would be welcome in Russia. The Republican party candidate has already said on the campaign trail he may recognise Russia’s annexation of Crimea and lift sanctions.

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