Schroders Quickview: Russia weathers the oil storm

First quarter Russian GDP surprised positively, contracting 1.2% year-on-year rather than the 2% expected, and much better than the 3.8% contraction of the final quarter of 2015. The economy looks to be weathering the oil price slump better than anticipated.

The early GDP release does not contain a breakdown of the data, so we will have to wait to see what has driven this better-than-expected performance. However, it likely reflects the advantages of allowing the currency to perform a large share of the adjustment to the oil slump and economic slowdown. Other commodity producers would do well to take lessons from Russia on this point. The rouble fell in line with oil and has remained at weakened levels as oil remains relatively range-bound. As a result, the current account surplus has grown; we expect net exports to have supported growth.

The weaker currency looks to have prompted a shift in the economy towards the tradeables sector as Russian industrial competitiveness has been boosted. High frequency data supports this view, with the consumer sector still struggling even as industrial production begins to recover. We still expect a small negative for growth this year, but risks look to the upside and a return to positive growth in the near future seems likely.