December 2012: Russia's economy to stabilize in 2Q13

In October, Russia's economy continued to decelerate to only 2.3% YoY growth: retail trade slowed to 3.8% YoY growth (the slowest since February 2010), manufacturing declined to 3% YoY growth (the slowest since October 2009, excluding March 2012), and agriculture contracted 13.3% YoY. After a temporary hike in September, cargo turnover posted zero YoY growth.

In contrast, services accelerated to 4.2% YoY growth and investment surprisingly grew 4.9% YoY. However, investment data for April- September has been dramatically revised upwards by Rosstat; we suspect it was due to completion of the Bovanenkovo field project (total investment of $50 bln). If we are right, then the current revision is a one-off, which cannot prevent the overall deceleration in investment activity.

We expect Russia's economy to grow 3.1% in 2013. We recently updated our medium-term macroeconomic forecast - now we expect Russia to grow 3.5% in 2012 and 3.1% next year, provided that the key risks of economic deterioration in Europe and the fiscal cliff in the US do not materialize. Retail trade, manufacturing, transport, communications, and banks will remain the key growth drivers, while resource extraction and utilities will lag.

High oil prices will support the ruble and improve government finances. At this point, we expect Europe to start emerging from recession in 2H13, in which case, Russia's economy will stabilize in 2Q13 and accelerate to 3-3.5% YoY growth by autumn 2013. However, we note that the outlook for Europe has gradually deteriorated, which increases the risks to our forecast.