Russia in the spotlight Q4 2015

- Oil price: to rise or not to rise
- Inflation: down two percent in annual terms 
- Russian economy: stronger supply, weaker demand 

Oil price: to rise or not to rise

There’s a chance that demand for oil catches up with supply in 2016. This would potentially remove the glut of oil from the global market and gradually lift oil prices from current low levels. On the supply side, the decline in US production should compensate for the increase in Iran’s output. On the demand side, India is expected to take over China's role as the driver of global oil consumption growth. However, these plans for a happy resolution of the supply glut may be easily upset by Saudi Arabia. The risks being double sided - the Saudis could either prolong the period of low oil prices or, if friction with Iran is aggravated, become the source of large scale disruptions to supplies. In this note we discuss the base case and the risks to a scenario of a modest recovery in oil prices in 2016.

Inflation: down two percent in annual terms

Inflation dropped substantially in Q4 despite the recent ruble weakening and a ban on import from Turkey for some of the food and non-food products. This is the effect of a high base of the end of 2014, when prices first spiked due to extreme ruble devaluation. The high base effect will be maintained in future months, enabling a continued slide in inflation in Q1 2016.

Russian economy: stronger supply, weaker demand

In autumn the economic situation improved slightly on the supply side, while demand remained weak. Better dynamics of manufacturing was the key factor behind industrial production improvement, while investments were supported by activity of exporters. On the other hand, the drop in retail sales increased in annual terms, which was mainly due to a high base effect.