Morgan Stanley predicts a recession in Russia

Toughening US sanctions will lead to a recession in the Russian economy, Morgan Stanley said. This is the third investment bank, which over the last week worsened the country's economic forecast due to restrictive measures by Washington.
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Sanctions against growth

The tightening of US sanctions against Russian system-forming state-owned companies will provoke a recession, which will squeeze the country's GDP by 0.5% in 2018, Morgan Stanley warned in its semi-annual forecast (available to RBC) for CEEMEA (Central and Eastern Europe, Middle East and Africa ). The negative effect of new restrictive measures will not be able to level even the rise in oil prices to $ 70 per barrel, analysts are sure.

"Given the higher uncertainty about the sanctions forecast, we see a more negative" bearish "scenario with a decline of 0.5% [in annual terms] if some of the Russian backbone state companies are included in the SDN list (sanctions list - RBC), "the survey says. Analysts did not specify which companies can be discussed.

"The strongest negative impact on the Russian economy from new sanctions and even a recession in the range of -0.2 to -0.5% is possible with sanctions under the Iranian scenario - the closure of foreign markets for Russian exports: oil, oil products, agricultural products, metals and etc. », - Vladimir Miklashevsky, economist of Danske Bank, said to RBC. The effect of a possible expansion of sanctions can be anything, says Dmitry Polevoy, ING's chief economist for Russia and the CIS: "It is important what companies are talking about, how many, what will be the scenario of sanctions: such as against" Rusal "or such as before in relation to banks and state-owned companies. " Sanctions against the oil and gas sector are "harder to guess", as this will have a big impact on global markets. However, we can expect a significant effect in sanctions against metallurgical companies, transport and fertilizer sector enterprises, adds Polevoy.

"We are eliminating the recession. We think that additional sanctions will limit the potential growth of the Russian economy, dropping it below 1% and consolidating the backlog of the global economy, "stresses Nordea Bank economist Tatiana Evdokimova. A "worse" outlook for the future is the limitation of potential growth rates due to uncertainty and low incentives for private investment, the analyst adds. Possible sanctions already deter foreign companies from investing in Russia, Miklashevsky adds. In these conditions, the implementation of megaprojects can help the economy.

Basic approach

Although Morgan Stanley's scenario of expansion of sanctions is not the main one, analysts have become more pessimistic in their basic forecast for the Russian economy for 2018. The bank worsened its expectations for GDP growth from 2.3% to 1.8%, becoming the third investment bank that made this decision in a week, explaining it with US sanctions, expanded in early April. Analysts expect that the restrictions will have a negative impact on business expectations, will cause a reduction in investments in the private sector and will increase the risk premium, which will increase the cost of loans. The forecast for investments in fixed assets has been reduced from 3.9 to 3.4%.

Earlier, Goldman Sachs (GS) reduced its estimate of Russia's GDP growth for this year from 3.3 to 2%; on Wednesday, May 16, Citi deteriorated it from 2.3 to 2%.

Revision of the forecast is facilitated by several factors besides sanctions, Morgan Stanley writes. In particular, the budgetary rule (the mechanism for buying currency for excess revenues from oil is more than $ 40 per barrel) hinders the positive impact of expensive oil on the economy. Another reason is the situation with the pre-election increase in public sector wages, which did not lead to an increase in sales within the country, but to an increase in online purchases abroad. In addition, the Russians preferred to send these funds to pay debts.

Ambitious goals

Russia by 2024 should enter the top five of the world's largest economies - such a goal in its May decree was put by President Vladimir Putin. To achieve this, GDP should grow by 6% per year, said Alexei Kudrin, chairman of the board of the Center for Strategic Research, later becoming the main candidate for the heads of the Accounts Chamber. But last year the economy grew only by 1.5%, and in the next three years (as expected by the Ministry of Economic Development) will grow by a maximum of 3.1% even when implementing reforms under the target scenario.

The Ministry of Economic Development plans to lower the forecast for Russia's GDP growth in 2018 from the current 2.1% due to weak growth at the beginning of the year, told reporters on Wednesday. head of the department Maxim Oreshkin, without specifying the exact figures for the new forecast. "I think, given the not very good economic situation at the beginning of this year, our economic growth rate will be lowered," Oreshkin said. In the first quarter, GDP grew by 1.3%, Rosstat reported earlier.

In its optimistic version of the forecast, Morgan Stanley predicts GDP growth of more than 3%. This can be facilitated by moderate geopolitical tensions and reforms. Growth in this case will accelerate investment in the private sector and increase labor productivity, experts say.

The deterioration will be gradual

GS, according to the baseline scenario, does not expect the expansion of sanctions in the near future, but predicts a gradual deterioration of US-Russian relations in the long term. Citi also does not expect tightening of restrictions in the near future.

Sanctions and the weakening of the ruble will help accelerate inflation to 4.1% in 2018, notes Morgan Stanley. According to the forecast of GS, the indicator will reach 3.3% by the end of the year. According to Morgan Stanley and GS, the key rate will decrease by the end of the year to 6.75 and 6.5%, respectively.

The additional oil and gas revenues will be channeled to the National Welfare Fund, reminds Morgan Stanley, and the rise in oil prices will make it possible to shift from a budget deficit in 2017 (1.4% of GDP) to its surplus in 2018 (1.5% of GDP). Meanwhile, in the draft amendments to the budget, which the Ministry of Finance developed, a surplus of 0.4% of GDP is expected.

The foreign trade balance will remain at an acceptable level - an increase in oil quotations by $ 10 will increase revenues from energy exports by $ 30 billion, and a weakening ruble will restrain the restoration of imports this year. This should reduce the shocks caused by sanctions, analysts of Morgan Stanley believe.

Again without reforms

According to Morgan Stanley, the changes in the government do not presuppose the preparation of radical reforms, with the exception of the pension reform (the Ministry of Finance and the Ministry of Labor have already developed options for raising the retirement age, sources told RBC). The effect of the new national goals and priorities announced by Vladimir Putin will be limited, as the increase in spending in some areas will be offset by their reduction in others or increase in taxes, analysts say.