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Russia Follows the World as the Recession Becomes Milder

Data clearly shows that there may not only be light at the end of the tunnel for the Russian economy but the recession may be coming to an end sooner than one could have anticipated even a few months ago. The three most important variables for the Russian economy; the money supply, the Purchasing Managers Index (PMI) and of course the oil price, suggest that although the Russian economy will probably grow at a more modest rate in the longer term, it is likely to stop contracting.

Of the three indicators the oil price is clearly the most important, with prices more than doubling from their trough in January to around $70/bbl. This has meant that despite the relatively minor interest rate cuts carried out by the Central Bank of Russia, the money supply (M2), although still below the level consistent with trend growth and the inflation target, grew by 8 percent in July on a six-month annualized basis. The service sector PMI is above 50, indicating an expansion. With many believing that America is now out of recession, the stage looks set for a worldwide recovery that could further boost the Russian economy.

However, a note of caution needs to be sounded. The legacy of the last eighteen months is that American consumers are likely to start adopting a more cautious attitude to debt, reducing imports into the United States. The IMF and the OECD have also warned that global growth may be anaemic next year. Such stagnation would be clearly bad news, both for those who work for export orientated firms and oil prices generally. The launching of a new generation of super energy efficient cars could also put an effective ceiling on oil prices.

It should also be noted that there are several risks to the downside. The U.S. recovery may be a chimera, while there are some indications that the Chinese recession that was predicted last year, may merely have been delayed rather than prevented. Certainly, a fall in Chinese or American demand could send both manufacturing and oil prices back to square one. The attempts to curb oil speculation that are being introduced by the major world commodity exchanges will undoubtedly move prices downward even if the economic outlook remains more benign. This vulnerability is especially important, since the Central Bank of Russia has demonstrated over the last year that it is unable to apply the appropriate monetary tools to combat the threat of deflation.