Article / 01 March 2016 at 11:00 GMT

Russia's incredible shrinking economy

Russia oil and gas expert
United Kingdom
  • Russian economy continues to contract
  • Gas, oil production still at record highs
  • $20/b oil could see capital or currency controls


The Russian economy may be running on empty,but Moscow 
is not sounding the alarm – yet. Photo: iStock 

By Nadia Kazakova

The Russian economic ministry has just published its monthly economic overview. In January, the country's real GDP was down both compared to the previous month of December 2015 (minus 0.1% month-over-month) and against January of last year (minus 2.5% year-over-year). 

The drop in the oil price meant a weaker rouble, higher monthly inflation, and a fall in domestic demand. 

Russia's real GDP dynamic in 2015-2016, % m/m and % y/y:

It is little surprise that the economy continues to shrink. According to the ministry, all GDP components (as measured by demand) contracted last year except for net exports. The final household demand was down 10.1% y/y, investment demand (ex-inventory) was 7.6% y/y weaker. Net exports, on the other hand, almost doubled, mainly driven by a collapse in imports (minus 25.6% y/y).

The pattern repeated itself in January 2016 with real GDP down 2.5% y/y, mainly on the back of another drop in retail sales and – most likely – investments. 

Key macro statistics for January 2016, % y/y:


On the output side, industrial production did reasonably well, mostly due to colder weather which boosted utilities output. This also led to higher gas production, up 2.8% y/y, and domestic gas demand, up 1.1% y/y. 

Crude oil and gas condensate output has hit another post-Soviet record high of around 10.9 million barrels/day in January. Liquids exports were up 2.1% y/y to 4.9 million b/d. Most of the extra crude is coming from new fields at GazpromNeft, Bashneft and Tatneft. Output at Rosneft, Lukoil and Surgutneftegas – the country's three largest producers – was down y/y in January. 

As domestic demand for crude continues to decline (down 4.7% y/y in 2015), exports keep rising (up 9.4% y/y in 2015). This meant additional exports of 406,000 b/d in 2015. Even if the oil output stabilises (or is frozen), falling domestic demand could result in higher exports of both crude and refined products throughout 2016.

Outside the energy sector, exporters tried to compensate for the drop in domestic demand with higher exports. The overall output for most manufacturing industries, however, is declining (there only two exceptions, food manufacturing and chemicals production). This shows that export volumes can not cover the loss of domestic demand.

Exports as share of output at key industries in 2013-2015, %:

If the Urals oil price remains at its current level of around $30/barrel, the Russian economy may continue contracting within the range of 1-2% y/y. 

Domestic demand and the broader economy will only start to recover once real wages stop falling. At the moment there is very little upward pressure on wages, even in nominal terms (up 3.9% y/y in January). At some point, however, monthly consumer inflation should start falling and inflation-linked salaries in the public sector should stabilise real income.  

This bottoming-out scenario is feasible if the Urals oil price stays at $30/b or above. A drop in the oil price to $20/b or lower might cause another profound shock to the Russian economy. It might be too weak to withstand such an event without the government taking drastic steps to prop it up, possibly with capital/currency controls and/or monetary stimulus. 

Crude oil pumpjacks in Russia
Russia has withstood the prolonged collapse of crude prices, but any further dips 
could see the government forced to take new measures. Photo: iStock 

— Edited by Michael McKenna

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector
fxtime fxtime
Has unemployment started to rise?
Nadia Kazakova Nadia Kazakova
Officially, unemployment is either stable at 5.8% or even declining on seasonally adjusted basis (down 0.1% m/m to 5.6% in January, out of 71.3 million working population ). At the same time, registered unemployment is rising, now at 1 million people, and 255 thousand people work reduced hours.


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