Russian economy set to disappoint again in 2014

Reuters

By Maya Nikolaeva and Lidia Kelly

MOSCOW (Reuters) - Russia's economy is now forecast to have grown in 2013 at less than half the pace expected at start of the year and will perform only slightly better in 2014, weighed down by weak investment and tapering consumer demand.

A Reuters poll of 15 economists said that gross domestic product had risen just 1.4 percent this year, when last December they had predicted an expansion of 3.2 percent.

Economists are also more pessimistic about the economy's wellbeing next year than the government, envisaging growth of 2.0 percent, against the Economy Ministry's forecast of 2.5 percent.

Russia's economy decelerated sharply this year, reflecting deep structural problems that analysts and officials say undercut its long-term growth potential.

Investment by firms disappointed and international money has been flowing out of Russia, in part due to companies' concerns about political freedoms and the likely consistency of the legal backdrop in years ahead.

The fading of an economic success story that buoyed Vladimir Putin's first decade in power are increasingly a challenge to the president as he seeks reelection in 2018.

Economists now say there has been no growth in investment in tangible assets, such as buildings and plants, this year. A year ago, they had expected such expenditures would grow by 6.0 percent in 2013. For next year, they now expect a small rebound to 2.0 percent growth.

The pickup will come mainly from the expected spending from one of Russia's oil windfall revenue funds on infrastructure.

"However, their positive impact in 2014 should not be overestimated, as most likely it will not appear before the second half of the year," Maria Pomelnikova, an economist at Raiffeisenbank, said.

RATES ON HOLD

Inflation remains above target and will continue to be a headache at the beginning of next year, making it unlikely Russia's central bank will cut its key lending rate to help spur the economy before the second quarter.

Economists expect consumer price inflation to come in at 6.4 percent this year and ease to 5.2 percent next year. The central bank's initial forecast saw inflation at below 6 percent this year, but an unexpected rise in food prices has spiked the rate above the target.

As a result, the polled economists, who only a month ago expected a cut in interest rates already in the first quarter of 2014, now see it happening only in the second quarter.

"Against the backdrop of high food basket inflation, the overall CPI growth will come to around 6.4 percent at December-end, restraining the Central Bank from easing monetary policy at the beginning of next year," said Vladimir Kolychev, an economist at VTB Capital.

Expectations of only moderate growth in both the European economy and oil prices will also impact Russia's performance - and both factors carry risks, analysts said.

The government's budget strategy envisages an average price for Russia's main export of $104 (£63.54) per barrel next year.

Olga Lapshina, an economist with Bank St. Petersburg, said expectations of higher crude production in the United States and production plans from Iran and Syria may threaten that price.

"This can result in the average oil price falling to $98-$100 per barrel," she said.

"As a result (of weak European growth, oil risks), the country's economic growth will be very moderate."

Analysts also expect a weakening of the rouble, which now trades near four-year lows. At the end of 2014, they see the rouble at 34.20 against the dollar, weaker from Tuesday's 32.64 rate.

"Russia's central bank is continuing to act according to its plans on a weaker rouble," Vladimir Miklashevsky, an analyst at Danske Bank, said. "The rouble is set to stay weak over the next 12 months as part of the government's plan to stimulate economic growth."

(Reporting by Lidia Kelly; editing by Patrick Graham)

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