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Russian recovery likely to be drawn out and weak, says Fitch



By Andrey Ostroukh and Alexander Winning

The Russian economy will struggle to return to pre-crisis growth levels in the next few years because consumer demand will stay weak as people save more and spend less, Fitch Ratings said on Tuesday.

Consumer demand is the largest driver of Russian growth, while proceeds from energy exports, another important contributor, are seen stuck near multi-year lows as a global glut restrains oil prices.

Presenting Fitch’s forecasts for 2016-18, Associate Director for Consumer and Healthcare Tatiana Bobrovskaya said Russian consumers would stay focused on keeping costs down.

Some recovery in consumer demand was possible in the low and middle price segments of the market, she said, but stronger demand in higher price segments might only be possible from 2018.

“The year of 2017 will still be very difficult for retailers and producers,” Bobrovskaya said, adding that consumer confidence in the third quarter of 2016 remained at “crisis levels”.

The economy sank into recession in 2014 after Moscow annexed Crimea from Ukraine and the West imposed economic sanctions. Battered by a rapidly depreciating rouble and lower real disposable incomes, retail sales started falling in annual terms from early 2015 and were still down 5.1 percent year-on-year in August this year.

In a presentation on Russia’s retail sector in 2017, Fitch said consumer-facing businesses would also be pressured by people’s tendency to save more and spend less. Savings in Russia still provide attractive rates of return, with retail banks offering deposit rates of up to 10 percent.

Such rates, which have been supported by the Russian central bank only cutting its key rate twice this year, are above inflation, which is on track to hit a post-Soviet low in annual terms of 5 to 6 percent for 2016.

Spending activity ran out of steam as the rouble lost around half of its value since 2014. According to Russia’s statistics service, the average salary stood at 34,095 roubles ($547.93) in August. That used to be equivalent to more than $1,000 before the annexation of Crimea.

“The era of consumer demand being the major economic driver is over. The model of economic growth is changing and exports and investments will become the major drivers,” said Anton Stroutchenevski, senior economist at Sberbank CIB.

Given high real interest rates, Russia’s economic prospects now seem less positive in the short run, he said. Sberbank CIB recently lowered its 2017 economic growth forecast to 0.5 percent from 1.0 percent.

That is still more optimistic than the latest government forecasts, which envisage growth of just 0.2 percent next year. 2017 growth will be accompanied by a 0.6 percent increase in retail sales, which are expected to contract by 4.6 percent this year, the Economy Ministry believes. ($1 = 62.2255 roubles).