Resilient Russia looking to break the ‘1.5% growth trap’: Evdokimova

Russia is walking a fine line between sanctions and reform with some success, but it’s still caught in a growth trap, says chief economist Tatiana Evdokimova.

Russia may have weathered the sanctions storm with more success than might have been anticipated when they started in 2014, but in GDP growth terms, is still caught in a “1.5% growth trap”, said Nordea’s chief economist for Russia Thursday.

“We’ve seen huge progress in macro stability, but we’re also caught in a 1.5% growth trap and it’s been there quite a while,” said Tatiana Evdokimova at an event in Copenhagen. “The problem is that if we try to move to a higher growth trajectory, we will face labour shortage issues.”

Further sanctions threat

Evdokimova, speaking at Nordea’s annual Emerging Markets seminar, said that the two key challenges for business in Russia are the weakness in internal demand and the ongoing uncertainty of the economic situation, given the ever-present threat of further sanctions.

“The market is no longer pricing in a sanctions risk, at least for the short term,” Moscow-based Evdokimova said. “The US’ attention is primarily on the likes of China and Iran, but I also see the stability in terms of fundamental strengths like low government debt as such to be able to weather any shocks.

“Russia is ready to adapt even if hard sanctions come into play.”

Evdokimova said that the ruble could face a “rapid drop” if sanctions return but pointed out that the Central Bank of Russia has been adept at intervening to “ensure no threat to stability” and that she saw no reason why governor Elvira Nabiullina would not follow a similar route, with the added artillery of interest rate hikes up her sleeve.

Evdokimova pointed out that the weakness in internal demand on the back of a fifth successive year of declines in disposable income potentially represented a bigger issue for Russian business.

“When economic growth was high in 2006, this wasn’t a problem, but we no longer have strong purchasing power transforming into stronger demand,” said Evdokimova. “The weakness in internal demand means it is difficult to find ways to generate a return on investment.”

Tatiana Evdokimova: “Russia is ready to adapt”. Source: Nordea

Macro stability anchor

Evdokimova said that the central bank has done a good job of providing an “anchor for overall macro stability” by keeping to an inflation target of 4%, but with foreign direct investment at a historical record low in 2018 as foreign banks in particular hit the exit button, it was a tough margins environment for business.

Nordea’s chief economist for Russia nevertheless pointed to some relative successes already in 2019 with the ruble, for example, recovering much of its mojo after a difficult 2018 and, she added, with oil prices stable at around $70/barrel, there was good reason why it has been the best performing currency in the emerging-markets space. The rating agencies too have all returned Russia to pre-sanctions ratings, effectively a rubber-stamping of the successful stabilisation of the economy on the back of central bank policy.

Challenges remain, said Evdokimova, not least the demographic imbalances Russia faces, but foreign investors, she said, would do well to look at Russia again.

“Russian assets are currently undervalued,” she said. “Mineral extractions, as an example, remains highly attractive as an investment sector. This is all down to really strong achievements in macro policy.”

  • Nordea’s Emerging Markets seminar is an annual event that takes place in Copenhagen. To find out more, contact Jana Poulsenova. jana.poulsenova@nordea.com

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