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Deep Russia recession if oil prices fail to recover

If oil prices remain at current levels of around 45-50 dollars per barrel (Brent crude) in 2015, Russian GDP could fall by around 7 per cent in the current year, say SEB’s economists in a new Russia risk scenario research note. 

The economists say their main scenario is still that the oil price will recover later in the year and that GDP will fall by 4 per cent. That forecast assumes oil will average around 70 dollars per barrel in 2015. In this scenario, despite financial turmoil and sanctions, Russia has the muscles to provide a short-term buffer for the financial system, at least during 2015.

In the 50 dollar per barrel scenario, the rouble remains weak and could even be pushed lower than in December 2014, when it briefly broke through 80 per dollar. The economists see inflation peaking at 20-25 per cent in second quarter of 2015, compared to 15 per cent in the main scenario.

“In the darker scenario, Russia’s central bank is likely to use a combination of monetary tools such as massive rate hikes and heavy interventions,” says Mikael Johansson, head of Central and Eastern European research at SEB.

Furthermore Johansson says, the central bank will probably implement capital controls by limiting the ability of households to convert deposits to dollars and euros, and by escalating the requirement that corporations convert their foreign-currency export earnings into roubles.

Should economic sanctions related to the Russia-Ukraine conflict be intensified, Russia is in a much more vulnerable position than before the currency crisis, says Andreas Johnson, Russia analyst at SEB.

“GDP growth prospects for 2015 are markedly weaker. Escalated sanctions would hurt already fragile market confidence and worsen capital flight and put even more pressure on the rouble,” he says.

In the first three quarters of 2014 net private capital outflows totaled 85 billion dollars compared to 54 billion dollars for all of 2013.