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Bleak outlook for Russia as EBRD shows no signs of backing down

Vladimir Putin, President of Russia

The arrival of a new president of the EBRD has not pointed to any change in the bank’s frosty relationship with Russia, which economists believe faces a depressing outlook for economic growth.

Russia continues to face isolation from western markets as the new head of the EBRD ruled out a reconciliation between the development bank and the country.

Ties between the EBRD and Russia were severed in 2014 following the Crimea Crisis. In the years since, dialogue has been frosty, with neither side showing signs of détente.

The bank has confirmed that — despite the arrival of a new president — there will be no change to its Russia policy.

“Our shareholders have made no change to their position since 2014,” said President Odile Renaud-Basso this week. “We don’t finance new projects in Russia. No expectation of that changing in the year to come.”

The country has in recent years earned itself the nickname ‘Fortress Russia’ following its pivot inwards, both economically and financially, since the outbreak of geopolitical volatility and imposition of sanctions in 2014.

Although economic growth expectations across emerging Europe err on the optimistic side, Russia’s outlook is causing concern. The challenging relationship with the development bank is one of a string of pressures weighing on Russia.

“Russia presents a pretty depressing picture for economic growth,” said William Jackson, chief emerging markets economist at Capital Economics. “Coming into this crisis, Russia’s GDP growth hovered between 1% and 2%, which, if you think about Russia’s income level, is pretty low.”

Although Russia’s reserves appear strong at about $600bn and the central bank has moved quickly to meet domestic inflationary pressures, with the latest hike this month taking the key interest rate up 50bp to 5.5%, there are longer-term concerns about the former Soviet state.

 

Cause for concern

Jackson pointed to the lack of foreign investment and the weakness in productivity growth as worrying inhibitors to Russia’s economic growth.

Maintaining stability in the face of isolation from the international community has come at a great cost.

“When will people begin to stop tolerating such weak growth and low rises in income levels?” said Jackson. “We could envisage a scenario where this leads to major discontent, forcing the government to abandon its tight fiscal stance and become more dependent on foreign capital, which will be difficult without a shift in relations with the West.”

Ravaging sanctions imposed on Russia in recent years have practically severed its access to the international dollar denominated bond market. In an attempted show of strength after the latest sanctions in April, Russia in May sold a €1.5bn bond among international investors. The bond sale racked up a disappointingly low order book of €2bn, according to sources.

Even the typically optimistic investor community says there is sufficient cause for concern.

“Historically, Putin seemed to have been a good presence in the international community and succeeded in getting the best deal for Russia,” said Ricardo Adrogué, head of global sovereign debt and currencies at Barings. “Since 2014, he has lost that aura. Since then there has been low growth, high inflation and a lot of pressure from the foreign exchange market — it is a fortress, but not a productive or high growth one. Russia is willing to go through many sacrifices to make its balance sheet strong but it is not a long-term sustainable policy.”

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