Macroeconomic development

The year 2014 was marked by four key developments that have significantly contributed to the up-to-date performance of the global economy and will be shaping the global outlook for 2015-2016:

  • Oil prices have plummeted from ~US$108/barrel to ~US$55/barrel. The decline was caused by unexpected demand weakness in emerging market economies (especially China), steady rise in unconventional oil production in USA, and an OPEC decision to maintain current production levels.
  • The U.S. dollar has strengthened its position by 12% to the currencies of other developed economies (e.g., the euro and yen). This rise was supported by the strong recovery of the US economy (growth of 2.4% in 2014) and tapering of US Federal Reserve quantitative easing measures.
  • Currencies of many emerging markets have weakened, particularly those of commodity exporters.
  • Interest rates and risk spreads have risen in many emerging market economies, notably commodity exporters, while long-term government bond yields have declined further in major advanced economies, reflecting the effect of safe havens.

Global economic growth in 2014 remained at the level of 3.3% and remained driven by developing countries, especially China, India and ASEAN countries, which grew by 7.4%, 5.8% and 4.5% respectively. Growth in nearly all advanced economies has accelerated with the EU28 area growing at 1.3% (and expected to further boost its growth rate in 2015-2016) and USA and Canada growing at 2.4% each. The only exception was Japan, where the economy fell into technical recession, resulting in a growth rate of just 0.1%.

For Russia, the year 2014 turned out to be one of the most challenging years of the past decade and a half. The investment climate and overall macroeconomic environment have drastically worsened due to the coincidence of several factors:

  • A drop in oil prices by ~50% (while oil, gas and oil products still contribute to more than 70% of Russian exports).
  • The crisis in Ukraine and international sanctions on Russian financial and oil production and military machinery industries with a reciprocal embargo on food imports from the EU and USA.
  • The strengthening of economic stagnation due to the exhaustion of growth potential of the previous economic model of 2000-2013 (which was based on the continuous growth of oil products and low cost of energy, raw materials and labour, the availability of sources of relatively cheap financing and initially low saturation level on consumer markets)

The Russian economy has been stagnating and demonstrated just 0.6% of growth in 2014 (1.3% in the previous year). Throughout the year the economy has been slowing down and quarter-by-quarter growth in Q1, Q2, Q3 and Q4 amounted to 0.0%, 0.1%, 0.0% and -0.4% correspondingly.

The drop in oil prices has resulted in slight-to-moderate depreciation of all the currencies of the oil-producing developing countries. However, the Russian ruble has shown the worst performance among them, plummeting by 42% to US$ and by 34% to EUR (RUB/US$: from 32.66 to 56.26; RUB/EUR: from 45.06 to 68.34). The devaluation of the ruble was caused by the stagnation of the economy, further deterioration of the investment climate and the drastic weakening of the national Balance of payments, which has changed from -US$11.3 billion in 2013 to -US$110.9 billion in 2014. This drop in the Balance of payments was mainly due to the huge increase of capital outflow from Russia, which has increased by 250%, from US$61 billion in 2013 up to US$152 billion in 2014. At the same time the balance of the trade of goods and services remained positive and amounted to +US$131 billion for 2014. In this environment, the Central Bank of Russia has changed its previous policy of currency band in order to slower the diminishing of national FX reserves. The newly adopted policy presumes high volatility on the FX market and minimum and unpredictable interventions by the Central Bank of Russia.

Simultaneously, the Central Bank of Russia has raised the key interest rate, which is used to provide liquidity in rubles to all commercial Russian banks and via them to other sectors of the economy. The interest rate was raised several times and has ultimately increased from 5.5% in December 2013 up to 17.0% in December 2014. This measure has contributed to the slowing of the devaluation of the ruble but simultaneously resulted in the sharp increase of the cost of financing for all Russian companies and private individuals. Nevertheless, the total sum of credits issued by banks to corporate lenders has increased by 11% in comparison to 2013, from 210 trillion rubles to 232 trillion rubles. This has resulted in the 19% increase of the national corporate debt load, from 22.5 trillion rubles in December 2013 to 26.8 trillion rubles in December 2014.

Slowdown in the real sector has been reflected on the Russian stock market, where the RTS index (based on market capitalization in US$) has been decreasing throughout the year from 1,370 points in January to just 740 points in December (drop by 46%). At the same time, the MICEX index (based on market capitalization in rubles) has decreased from 1,500 points in January to 1,400 points in December (a 7% decline).

Real domestic consumption in Russia has slowed down its growth rate from 3.9% in 2013 to 1.5% in 2014. Investment in fixed assets has decreased by 2.5% and constituted 19.0% of GDP.

Russia experienced 1.7% of growth in industrial output in 2014 (0.4% in 2013). Growth was driven by manufacturing and raw materials extraction sectors, growing at 2.1% and 1.4% respectively. The three best-performing industries were the production of transportation vehicles (growth of 8.5%), rubber and plastic (7.5%) and oil products (5.7%). At the same time energy, gas and water production and transportation stagnated at -0.1%. The profitability of the absolute majority of producers of industrial products has significantly decreased across all industrial segments.

Due to the devaluation of the ruble and a Russian embargo on the import of food products from the EU, inflation (Consumer Price Index) in Russia has drastically increased from a previously stable level of 6.5% (in 2012 and 2013) up to 11.4% in 2014. At the same time, the Industrial Goods Producers Price Index has increased only by 5.9%, reflecting the downfall in global prices for oil and oil products and decreasing domestic demand for the investment goods.

Real wages in Russia have grown on average by just 1.3%, while the real disposed income of population has decreased by 0.8%. The unemployment rate remained stable at the low level of previous years and amounted to just 5.5%.

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