Russia: EconMin assumes low oil prices and high inflation for 2016-2019

The EconMin drafted new basic assumptions for the upcoming macroeconomic forecast for 2016 and 2017-2019, Vedomosti daily reported on Thursday. The basics suggest that oil prices will remain low, below USD 50 for the entire period which underpins higher inflation and weaker economic performance. The baseline scenario assumes the oil price at USD 35 in 2016 rising slowly to USD 40 in 2017 and stabilizing at USD 45 in 2018-2019. In the conservative scenario oil prices are envisaged to be USD 10 lower. There is no optimistic scenario. Other assumptions are accelerating world economic growth, but continuation of Western sanctions against Russia (and countersanctions) for the entire period. This will reduce net capital outflows to USD 15bn in 2019 from USD 35bn in 2016, the ministry projects. The EconMin has not announced GDP projections yet, but the expected level of oil prices suggests that the recession will continue for at least a year. In the latest EconMin forecast USD 40 oil price will reduce GDP by 0.8% in 2016.

Under these assumptions the EconMin does not expect inflation to reach the 4% target over the four-year period. The draft shows expectations for inflation ending 2016 at 7.7% and slowing gradually to 6.2% in 2017 and 5.5% in 2018. Despite higher inflation, pensions and social payments are expected to be indexed with the targeted inflation rate of 4% which should mean a decline in real incomes. Budget sector wages will remain frozen until 2019, according to the assumptions, while the state administration should shrink by 5% per year. At the same, freezing of funded pension contributions will remain in place for the entire period. We note that the assumptions may change again before the presentation of the official macroeconomic forecast later this month.

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