Analysis: More Bad News for the Russian Economy

Vladimir Putin, cc Russian Presidential Press and Information Office

Background

Russia’s economic downturn appears to be intensifying. The economy contracted by 4.6% over the second quarter, following a 2.2% contraction in the preceding quarter. This latest contraction came in larger than many were expecting, and given the persistently low level of energy prices, it appears the worst is yet to come.

Low energy and commodity prices have combined with a capital flight to leave the Russian rouble battered and bruised. The currency has lost nearly 40% of its value over the past year, enough to rank it among the world’s worst performers over the period. This has led to rampant inflation, which reached around 15% in July, eating away at the purchasing power of Russian consumers.

Retail sales have been taking a battering, plunging 9.4% in June. Since the Ukraine crisis began, Russians have seen their incomes fall by around 13% in real terms. Yet increased inflation, uncertainty, and sagging consumption will likely have knock-on effects over future reporting periods as well. In other words, it will take more than just a recovery in energy prices to reverse the decline in Russia’s economic fortunes – traumatized Russian consumers will need to slowly ramp up their buying as well. This is a critical consideration in a country where consumer spending acted as the engine of economic growth through the boom times of the 2000s.

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