Why China's slowdown should not worry Russia

Russia's central bank governor warned on Tuesday that China's economic prospects were a growing concern for the country, but economists believe the Russian economy faces greater challenges from a shift in domestic policies.

Russian Central Bank Governor Elvira Nabiullina was quoted by Russian media agency Interfax as saying that China's economic slowdown was "increasingly worrying." Russia is carefully watching China's slowing growth rate and any indications of stimulus on the part of the People's Bank of China.

But while it is natural for Russia to watch China closely, experts are sanguine on the threat a slowing Chinese economy poses to the country.


Russian President Vladimir Putin (R) shakes hands with Chinese President Xi Jinping.
Sasha Mordovets/Getty Images
Russian President Vladimir Putin (R) shakes hands with Chinese President Xi Jinping.

"Policymakers everywhere are increasingly realizing the importance of China…Russia is no different and what's going on in China will be very important in terms of what it means for demand for Russia's exports," Liza Ermolenko, emerging Europe economist at Capital Economics said.

But demand for oil and oil prices are a far more important factor in determining the outlook for the country's economy, she said, a sentiment echoed by Oleg Kouzmin, Moscow-based economist for Russia and CIS countries at Renaissance Capital.

He told CNBC that while RenCap sees "some headwinds" for Russia as a result of the China slowdown, oil and sanctions were more of a worry.

"We don't think there will be a direct impact on Russia but it will have an indirect impact as China influences the rest of the world, and a slowdown for the global economy will have more of a direct impact on Russia. But a bigger problem for the country is oil prices and sanctions."

Shifting fortunes

There was once a time when Russia and China, members of the once-lauded emerging market BRIC family (Brazil, Russia, India and China), were on the same trajectory to economic superstardom. In fact, in 2000, Russia's growth rate far exceeded China's, at 10 percent when China's was "only" 8.4 percent.

In more recent years, however, as China's growth has continued apace, Russia has experienced a sharp decline and in 2015, albeit slowing down, China's gross domestic product (GDP) is still forecast to grow 6.8 percent while Russia is expected to see its recession-hit economy shrink by 0.6 percent, according to the latest forecasts from the International Monetary Fund (IMF).

The divergence in fortunes was largely brought about by the sharp fall in oil prices, on which Russia relies, and geopolitical decisions by the Kremlin. Its annexation of Crimea in March 2014 and role in the pro-Russian uprising in east Ukraine prompted the west to impose sanctions on Russia, isolating it economically and politically.

Resource-rich Russia could have perhaps dealt more comfortably with its alienation from the West were it not for the concurrent slide in oil prices from around $114 a barrel in June 2014, to current levels around $50.

As such, Russia was hit with a double-whammy of sanctions and oil price declines (on which much of its government revenue relies) as well as capital flight, a ruble devaluation and rampant inflation as a result, with the rate at 15.7 percent in September.

The central bank of Russia has been stuck between a rock and a hard place trying to both combat inflation (with high interest rates) and kickstart the economy (warranting a drop in interest rates). Inflation is slowly easing, but remains far from the bank's 4 percent target for 2017.

On the up?

Marcus Svedberg, chief economist at East Capital asset managers, told CNBC Tuesday that Russia was heading for a recovery and had no more to fear from a China slowdown than the rest of the world.

He said he was "puzzled" by comments from Russia's central banker, and others, expressing worries over China, saying a slowdown was always expected.

"Yes, the Chinese economy is slowing down but that's according to plan. It's a modest deterioration, consumption and manufacturing are still holding up."

"No, I'm not worried (about China's slowing growth rate)," he said. "Of course, there are some risks for Russia but China's slowdown has been orderly so far."

Svedberg believed that Russia's economy was going to recover, and he is not alone in voicing such expectations.

That recovery could however be hampered by the country's controversial foray into the Syrian civil war and apparent support of President Bashar al-Assad.

Stephanie de Torquat, Investment Strategist at Lombard Odier, said in a note on Tuesday that Russia had "seen the worst" and that it could attract investors again -- if geopolitical factors did not deteriorate.

"While the current environment is not very conducive to investment, government economic reforms could be a welcome sign of a future revival on that front," de Torquat said in a note Tuesday.

"Our scenario for Russia in 2016 is one of a modestly rebounding and volatile ruble from current weak levels, easing inflation from high levels, and growth moving back into (just) positive territory from deep recession levels, bearing in mind that politics and geopolitics remain the biggest exogenous downside risk."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld