First Signs of Russian Economic Recovery in 2017

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The Russian Federal State Statistics Service recently surprised to the upside with new economic data.  As reported by BloombergMarkets, FocusEconomics and others, the Statistics Service reported a smaller -0.2% decline in GDP for 2016 than the -0.6% decline expected by many, including Russia’s Economic Ministry as recently as November.  Even more surprising, 2015 GDP was revised upward to a smaller -2.8% decline instead of -3.7% as previously reported.  And now First Deputy Prime Minister Igor Shuvalov, as reported by Bloomberg, expects GDP growth in 2017 of 1-1.5%, if not 2%.

What accounts for the improvement?  Bloomberg reports that the improvement reflected signs of growth in some sectors; manufacturing rose 1.4% in 2016, commodities including oil and gas production were up 0.2%, and agriculture was up 3.5%, though investment and consumption have not yet turned around.

Bloomberg quotes Nikolay Kondrashov at the Moscow Development Center of the Higher School of Economics, that key drivers in 2016 were an increase in exports and a “rebuilding of stocks”, which was “very strong”.  An increase in exports is perhaps not surprising given the devaluation in the ruble, but a very strong rebuilding of stocks seems odd without evidence for an increase in sales.  Until investment and consumption recover, why build inventories, other than to make output look good?  And output will fall again as inventory levels become unsustainably high.

The explanation may also be that the new numbers do not show an actual improvement in economic activity over what was expected but a change in methodology, as mentioned by Reuters.  The improvement by a third in the 2015 GDP number would feed through to the 2016 numbers and influence the “animal spirits” expectations for 2017, all while little really changed.  In this light, the improvement in the end 2016 numbers means that the recovery in the economy is virtually flat.  The Russian economy seems to be stabilizing, but a return to growth awaits evidence of solid, sustained economic activity.

The seeming improvement in the economy though is certainly helpful to Putin in the run up to the 2018 presidential election, if the Russian people are convinced things are getting better.

However, in Russia it is wise to eat your dark bread with a large pinch of coarse salt.