EBRD cuts Russia’s growth forecast on oil price fears

The European Bank for Reconstruction and Development (EBRD) has cut this year’s GDP growth forecast for Russia to 3.1% from its May forecast of 4.2% on the back of concerns regarding the Eurozone crisis and its impact on the oil price, which remains the biggest worry for the country.

About half of the Russian budget is based on taxation of the oil and gas sector. The bank’s report states: “Since early this year, the crisis has negatively impacted oil and other commodity prices as well as investor confidence, which has in turn led to lower growth in Central Asia and particularly in Russia, where quarterly GDP and industrial production slowed down significantly during the first half of 2012.”

“The protracted Eurozone crisis is now impacting growth across emerging markets, depressing global commodity demand and hence prices, and directly affecting growth in Russia and other commodity exporters,” the report continues.

Mark Livingston, associate investment director in Fidelity’s global emerging markets team, said: “The Russian federal budget balances at an oil price of $110 per barrel, and we expect prices to remain between $80 and $110 per barrel. Anything below $110 is bad for Russia’s fiscal deficit, so this is not a positive picture.” As a result, Fidelity is underweight Russia in its global EM portfolio.

EBRD’s report also highlights continued capital flight from Russia as a factor that negatively impacts domestic demand and investment.

“Non-FDI outflows from Russia further increased in the first quarter of this year and became a major factor responsible for the negative flows for the transition region as a whole,” the report says.

“Outflows from Russia may have been driven by the second round effects of the Eurozone debt crisis, which has made markets more risk averse, as well as low investor confidence in the country.”

Net capital outflows from Russia reached $ 43.4bn in the first half of the year.

Year-on-year GDP growth in Russia slowed down from 4.9% in the first quarter to an estimated 3.9% in the second quarter. The stock market dropped 25% in the second quarter, trampled by lower oil prices and election-related fears. The rouble has depreciated 10% against the U.S. dollar, while inflation rose to 4.3% in June.

Continued droughts in key food producing regions of Russia this month are putting further upward pressures on inflation. These factors are likely to negatively impact GDP growth.

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