Elvira Nabiullina, governor of Russia's central bank, gestures as she speaks during a news conference to announce interest rates at the headquarters of Bank Rossii in Moscow, Russia, on Friday, Dec. 16, 2016. Russia’s central bank left borrowing costs unchanged for a second meeting while also opening the way to monetary easing after this year’s unprecedented pledge to keep interest rates on hold. Photographer: Andrey Rudakov/Bloomberg
Elvira Nabiullina, governor of Russia's central bank © Bloomberg

After more than two years of recession Elvira Nabiullina, Russia’s central bank governor, had good news to offer. Russia, which has struggled to get over a slump triggered by a sharp drop in oil prices and by western sanctions, was set for “slight positive growth in GDP” in the current quarter, she said on Friday.

With oil prices ticking up, and hopes that a US administration led by Donald Trump could bring at least some sanctions relief, some investors have taken the view that Russia’s recovery can gather steam. International funds are taking an interest in Russian stocks again, with the Micex, the main stock market index, soaring 27 per cent this year.

Inside Russia, though, expectations are far more muted. Most people have yet to feel any economic stabilisation. Real incomes continue to shrink. Inflation, although expected by the central bank to drop to under 5.8 per cent by the end of the year from more than 15 per cent last December, continues to eat into pensions and salaries. Consumers remain timid: retail sales fell 4.4 per cent in October, year on year.

“This recovery will be long and gradual. We are not exiting recession through one door but through a long corridor,” says Oleg Kouzmin, a former Central Bank official and now Russia economist at Renaissance Capital.

When and how quickly sentiment changes matters for the country’s political leadership. Russia is due to hold presidential elections by May 2018. President Vladimir Putin has yet to announce whether he will run. Although there is no credible challenger in sight and the country has not seen really competitive elections in more than a decade, the Kremlin is watching public sentiment closely.

“No matter if the GDP growth rate is minus 0.5, or zero, or even plus one — it won’t feel very different in the near future, because we are still far from anything like a real rebound,” says a senior government official.

Analysts, and several members of Mr Putin’s economic policy team, say such a recovery will remain elusive unless Russia embraces structural reforms.

Both the central bank and independent economists say that, even with a brighter global economic climate and a recovery in domestic demand, Russia will be unable to grow at more than 2-2.5 per cent in the long term. Years of anaemic investment have left the economy short of the capacity to benefit.

Many economists have urged a higher retirement age to stabilise the pension system, and more flexibility for a jobs market squeezed by a shrinking population. Mr Putin has delayed action on these unpopular measures.

“Mr Putin has paid lip service many times to those calling for drastic reforms,” says an executive with an international institution, who asks not to be named because of the topic’s political sensitivity. “But he has failed to address the key things: reform the labour market, reform the pension system and, most important of all, allow the institutions to do their job independently.”

One of the main drags on investment even before the latest recession has been companies’ lack of trust in Russian courts and fear that their property might be at risk.

Mr Putin has asked former finance minister Aleksei Kudrin, a long-term adviser, for an economic reform programme by May. His proposals are expected to partly focus on reforming political institutions but many observers are sceptical that this push — at odds with the authoritarian nature of Mr Putin’s rule — can succeed.

Nor would any easing of sanctions — sparked by Moscow’s annexation of Crimea from Ukraine in early 2014 — be a “game-changer”, says Vladimir Tikhomirov, Russia economist at BCS, a brokerage. While lifting sanctions could provide a temporary boost, easing pressure on Russia’s balance of payments and supporting a rise in investment, it would add no more than half a percentage point to GDP growth, he says.

The central bank remains cautious. Crude prices are markedly above the $40 level on which it based its economic forecast three months ago. But the bank sticks to its prediction that GDP will contract by 0.5-0.7 per cent this year and grow by 0.5-1 per cent in 2017, saying more time is needed to assess the factors influencing oil prices.

While many in Russia welcome the stabilisation in oil prices, given the country’s heavy reliance on oil and gas exports, it also reduces any incentive to broaden the economy away from resources.

Some industry, made more competitive because of the rouble’s fall, has been less hit by the recession than services. Foreign manufacturers in the country have benefited, while Russian conglomerates have seized the opportunity to use revenue earned abroad to invest in cheap domestic assets and ramp up production in sectors such as agriculture, food and pulp and paper.

“Manufacturers took the easy gains when the rouble weakened,” says Mr Kouzmin. “If it strengthens too much alongside oil, the import substitution benefits could disappear.”

Some government officials argue that Moscow should prevent the currency from strengthening to help keep domestic manufacturers in a more comfortable position.

But Ms Nabiullina is fiercely defending the rouble’s free float, which she fought for in late-2014. “We are already seeing that the rate has become less volatile than oil, which the currency practically shadowed in the past,” she said on Friday. “The more diversified the economy is, the fewer negative consequences there will be from the free float.”

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