The fall in Russian GDP last year of 3.0% was better than expected and economists at Capital Economics think GDP will be closer to its pre-virus path than in other EMs by the end of 2022. What’s more,inflation is set to remain above target, prompting further interest rate hikes but there are some doubts that rates will rise as far as most currently expect.

Strong recovery to take place later this year and in 2022

“New virus cases have fallen in recent months and, so long as the outbreak remains under control, we think that restrictions on activity will continue to be eased. Russia’s vaccine rollout has been slow so far but we think it will gather pace and that the most restrictive measures are likely to be eased later this year.”

“We expect GDP to expand by 3.5% in 2021 and 3.3% in 2022. This is above the consensus and we think GDP will be 0.9% lower at the end of 2022 than if the crisis had not occurred. This is a better outcome than most other large EMs.”

“Inflation peaked at 5.8% YoY in March, but we think it will fall only slowly this year and return to the 4% target in early 2022. The central bank’s determination to bring inflation back down is likely to prompt another 50bp of interest rate hikes, to 5.5%, in the coming months. Investors’ expectations for an additional 150bp of tightening by end-2022 appear overdone.”

“The risks are skewed towards more aggressive tightening. Russia’s relationship with the West has deteriorated and the threat of tighter US sanctions has taken its toll on the ruble this year. A lot of news is already priced in, but we think that lingering concerns about sanctions, rising US Treasury yields and a slight fall in the oil prices to $60pb will push the ruble to 80/$ by end-2022.” 

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