Russia's Economic Prognosis

Last week the World Bank released its Russian Economic Report, forecasting an annual GDP contraction of 7.9 percent and a 10 percent reduction in the ranks of the middle class. The report highlights a 59 percent drop in year-on-year capital flows for the first five months of 2009, contributing to a decline in all major sectors of the economy.

What will be the leading factors of a Russian turnaround? Goldman Sachs argues that the restoration of capital flows is more important to Russia's economic recovery than the return of higher oil prices. From Bloomberg:

Russia's deep output decline, in our view, is less the direct impact of lower commodity prices and more the effect of the sudden stop in capital inflows that the country suffered beginning in the third quarter of 2008.

When can we expect these capital flows to return? The Bank of International Settlements, which released its annual report today, expressed doubts about forecasting when and how capital flows will return to emerging markets, including Russia:

Since the current crisis is associated with an unprecedented contraction in global economic activity, it is extremely uncertain when and how far private capital inflows to emerging markets (EMEs) might recover... Because the crisis originated in the financial systems of advanced economies, the standard remedy in the past – reforming policies in emerging market economies – is not likely to restart the flow of capital to EMEs on its own. Moreover, it is not clear how global current account imbalances – which were an important factor in the surge of capital flows to and from emerging markets in the period before the crisis – will eventually be resolved.

Meanwhile, the Financial Times reported that the Russian government is considering a bank recapitalization program larger in scale than that of the United States. The proposed program, which would affect banks with over 50 billion rubles (US$1.6bn) in assets (roughly the nation's 60 largest), involves the government providing long-term, ruble-denominated OMZ bonds in exchange for an active shareholder role. 

In short: Russia's downturn, and its future recovery, is clearly dependent on much more more than just the price of oil.