Stealing a peek at Russian economic recovery before it happens
Prone to false starts since a crisis peaked last year, Russia’s economy is riding momentum that has it on the cusp of exiting the longest recession in two decades. As business sentiment perks up, leading indicators from demand for electricity to rail cargoes and container transport show the pulse of the economy is starting to beat faster. Data due this week will show gross domestic product last quarter contracted the least since it slipped into recession at the start of 2015, shrinking 0.8 percent from a year earlier.
“A fundamental infrastructure sector such as electricity offers a good reference point for the economic health of a country overall,” Renaissance Capital analysts Vladimir Sklyar and Anastasia Tikhonova said in a research note. “Applying for a grid connection and making a significant payment for it requires a long-term positive view on economic trends, and a spike in such orders in 2016 indicates to us that Russian economic agents are feeling much more optimistic than a year ago.”
Unlike the hairpin turns taken by the economy after its recessions in 1998 and 2009, which set the stage for sharp rebounds, the world’s biggest energy exporter has beenslower to retool this time. With investment posting the longest stretch of declines since at least 1995 after the crash in oil prices, Russia may now be approaching a turning point as capital-intensive businesses come to life.
The improving outlook is driving appetite for Russian assets. The Russian currency was the second-best performer in emerging markets last quarter with a gain of 4.8 percent against the dollar. Ruble volatility dropped to the lowest level in almost two years on Wednesday as investors sought close to four times the government debt tendered at an auction. The yield on 10-year sovereign notes declined for a fifth day.
“The rebalancing of the economy is more advanced and the stabilization momentum will be sustained,” Morgan Stanley analysts including Alina Slyusarchuk said in a report.
Russia’s electricity grids and railroads show the gears of the economy are grinding again. Annual gains in electricity demand accelerated to 1.8 percent in July from 1.6 percent in June and 0.4 percent in May, a signal the economy is “on the path to positive territory,” according to Renaissance Capital. Driven by payments of industrial consumers to gain connection to power networks, the electricity-grid industry has been racking up record profits, it said.
Shipments at Russian Railways, operator of the world’s longest train network that links Asia and Europe, are also returning to sounder footing. In the first seven months, rail cargo volumes are up 1.8 percent from a year earlier, with the transport of building materials soaring 19 percent.
The market for rail container transport last quarter posted its first growth by volume since 2014, according to UralSib Capital.
Should there be no additional shocks, growth may turn positive in the coming months, with GDP expanding 0.4 percent in the third quarter from the previous three months, the central bank’s research and forecasting department said on Monday.
“The moderate recovery will continue in the second half,” UralSib Capital analysts Alexey Devyatov and Olga Sterina said in a report. “The recovery remains fragile due to downside risks associated with the oil price, sluggish growth in the U.S., Brexit, and the risk of economic crisis in China.”