St Petersburg International Economic Forum

Russia is out to prove that 'doomsday' forecasts of economic collapse have failed

Key Points
  • Russia is preparing to welcome leaders and executives from the world of business and economics for St. Petersburg International Economic Forum (SPIEF)
  • The forum comes at a time when Russia's international relations are more unstable than ever.
  • Nonetheless, investors and market watchers will focus on the forum to hear what Russian President Vladimir Putin and other political and business leaders have to say.

Russia is preparing to welcome leaders and executives from the world of business and economics but this year's St. Petersburg International Economic Forum (SPIEF) comes at a time when the country's international relations are more unstable than ever.

Nonetheless, investors and market watchers will focus on the forum if only to hear what Russian President Vladimir Putin — who will attend and speak at the event — and other high-profile ministers, economists and business leaders have to say about the country.

This year, speakers include French President Emmanuel Macron and Japanese Prime Minister Shinzo Abe, as well as Russia's Central Bank Governor Elvira Nabiullina and Christine Lagarde, managing director of the International Monetary Fund.

Russia's relations with its western neighbors are at a low ebb, with its support for the authoritarian regime in Syria, a suspected Russian-directed nerve agent attack on U.K. soil and likely meddling in elections in the U.S. causing controversy and prompting suspicion among many members of the international community. Moscow denies having any part in the U.K. attack or political interference.

'Currently in very good shape'

The country remains under continuing sanctions for its annexation of Crimea in 2014 and its perceived support for a pro-Russian uprising in eastern Ukraine in the same year.

Still, SPIEF is an opportunity for Putin and other business leaders to tell the world that the Russian economy is "currently in very good shape," as the chief executive of Russia's $10 billion sovereign wealth fund told CNBC.

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"The doomsday predictions of Russia's international isolation or collapse of the Russian economy have failed. The economy has adapted itself to sanctions," Kirill Dmitriev, the head of the Russia Direct Investment Fund (RDIF) said via email.

"The inflation rate is at a record low of 2.4 percent year-on-year in April 2018 due to a prudent macroeconomic policy of the central bank and the government. The current inflation target is set by the central bank at 4 percent. The ruble exchange rate is stable while the central bank is in a rate-cutting cycle with the key rate at 7.25 percent."

He insisted that the current macroeconomic environment is creating "excellent conditions for the 'investment breakthrough' needed to sustain growth in the coming years."

Russia certainly appears to have weathered the storm prompted by international sanctions, having boosted its domestic economy due to import substitution, raising some awkward questions for the West over how effective sanctions can be in the long run.

In April too, the U.S. imposed more sanctions on a list of Russian government officials and oligarchs, and related companies, in retaliation for what it called "malign activity around the globe."

After shrinking in 2015 and 2016 amid the penalties and the slump in oil prices, Russia's economy grew 1.5 percent in 2017. The Kremlin is also hoping for a boost from the World Cup soccer tournament being held in Russia in June.

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There's no doubt that the economy has been through a rough ride, however, and the outlook remains uncertain given a reliance on its export-orientated commodity sector.

At least oil prices are on the rise, in large part thanks to Russia joining with OPEC producers in curbing production in a bid to balance supply and demand. From a slump to around $27 a barrel in 2016, Brent crude is now fetching around $79 a barrel.

RDIF's Dmitriev said the production cuts agreed with other oil-producing countries had "stabilized" oil markets and the price increase had brought an additional 3 trillion rubles ($49 billion) to the Russian state budget.

Is it going that well?

Not everyone thinks Russia's prospects are so rosy. "In the short-term, the economy is still in recovery phase," Neil Shearing, chief emerging markets economist at Capital Economics, told CNBC via email.

"My main concerns are about the medium-term outlook," Shearing said, noting that what he called the "dire rate" of productivity growth "reflects manifold problems, from a low investment rate and an increasingly statist economic policy, to a rigid labor market and financing constraints on SMEs (small and medium-sized enterprises)."

Ahead of his fourth re-election as president in March, Putin pledged to increase public spending on health care and infrastructure in a bid to revamp the economy. But Barclays Capital Economist Liza Ermolenko told CNBC that it was hard to see how a spending spree could result in "much more than a temporary boost to growth."

"It is difficult to see how the government could revamp Russia's entire growth model in the environment of poor demographics and the ongoing shift to an autarchic (self-sufficient) system," she said.

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Another expert on Russia said the government, which has talked a good talk about diversifying its economy away from oil, could squander the chance to make reforms.

"There is a high probability that the Kremlin will once again fail to use economic recovery and benign economic conditions to enact long delayed reforms and shifting away from hydrocarbon dependency," Daragh McDowell, principal Russia analyst at Verisk Maplecroft, told CNBC on Monday.

"The reveal of premier Medvedev's cabinet last week strongly indicated the Kremlin is committed to continuing to muddle through, rather than enact serious reform."

McDowell forecast "continued, mediocre growth" in the region of 1.5 to 3 percent per annum over the next three to five years. Capital Economics' Shearing was also cautious on growth prospects: "Growth over the long run will be stuck at around 1.5-2.0 percent or so, making Russia the worst performing major emerging market," he said.