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Russia – Will rate cuts stimulate growth?


The coronavirus has hit the global economy hard, and Russia has been no exception. In fact, the International Monetary Fund forecasts a 5.5 percent contraction of Russia’s growth in 2020, which would be the economy’s worst performance since the 7.8 percent contraction in 2009.

Unlike the downturns that emanated from oil price declines in 2008-09 and 2014-15, this time around, Russia’s central bank is reacting in a different manner. In 2009 and 2015, the Ruble decline alongside oil prices. As the currency weakened, inflation picked up and the Central Bank of the Russian Federation raised short-term borrowing costs significantly with the aim of bringing inflation back down. However, this time round, the Bank of Russia is cutting interest rates and possibly could cut its official rate to a post-Soviet record low.

Luckily, Russia’s central bank has been able to cut rates largely because the Ruble has been more stable in the face of weaker growth unlike in the past. During the 2008 global financial crisis, the Ruble fell by 37 percent versus the U.S. dollar. Furthermore, during the 2014-16 oil price plunge, the Ruble fell by 61 percent versus the U.S. Dollar. So far in 2020, the peak-to-trough selloff in RUBUSD amounted to 26.5 percent, and the Ruble has since rebounded sharply.

Part of the Ruble’s recent resilience stems from the nature of the global crisis itself. In 2014-16, the global economy was doing relatively well except for commodity producers, especially oil exporters. In 2020, in contrast, most of the economies seem to be in the same situation. Thus, the problems afflicting the Russian economy in 2020 reflect those in the U.S., Europe and the Rest of the World.

With Russia’s interest rates still far above zero, its central bank still has the option to cut rates further to stimulate growth. In many other economies where rates are stuck near zero, stimulus has taken the form of unprecedented large fiscal stimulus, something that Russia has largely avoided so far.

In addition to, as Russia’s central bank cuts rates, it has been gradually steepening the yield curve. As of mid-June, Russia’s 1-10 year yield curve was the steepest that is been since 2011. Hence, further cuts to short-term rates might steepen the yield curve even more.

If so, that would most likely be good news for the Russian economy. Over the past 13 years, there has been a strong positive correlation between the slope of Russia’s yield curve and subsequent GDP growth – though, in times such as these, the coronavirus remains the major factor in question affecting economic data.

That said, even with lower interest rates, depositors in Russia will enjoy about a 5 percent spread over depositors in the U.S. and Europe. However, the more central banks cuts interest rates towards U.S. and European levels the smaller that buffer is likely to become. When it comes to cutting rates further, the Bank of Russia’s main limitation may be continued low rates of inflation. So long as inflation doesn’t pick up and the Ruble remains relatively stable, the central bank may feel little need to tighten policy.

Conclusively, so far Russia has spent about 2 percent of GDP on fiscal support aimed at mitigating the impact of the coronavirus lockdowns. With public debt amounting to only 15.5 percent of GDP, the Russian government possesses substantial borrowing capacity, should it choose to deploy it.

This article was issued by Maria Fenech, Credit Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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