EME Macro/Strategy: Russia – still transitioning towards a new model

The link between world oil prices and Russia’s GDP growth has become looser and, in our view, this trend is likely to continue in the coming years. This shift is partly the result of a policy decision, partly the indirect effect of the EU-US sanctions and partly an almost necessary evolution after earlier years of very fast debt increases in the private sector. None of these three underlying factors is likely to change in the near term, so we believe that this transition is about halfway through its full process. Monetary policy is likely to deliver further aggressive easing in the coming two years, which would improve the affordability of consumer debt. Fiscal policy will focus on improving infrastructure, which may help to boost the potential growth of the economy, over time, but it is too soon to say whether that will genuinely materialise. In any case, boosting potential growth would require improvements in the trust of Russians in its judicial system and institutions: not something that can happen overnight.