Russia: too much, too soon

Russian assets have been on a roll in the past few weeks. The ruble has bounced by more than 15% since mid-January, leading a revival of Eastern European currencies. Russian stocks are up by 15% in ruble terms, while the RTS index, which measures the performance of leading stocks in dollar terms, has bounced by almost 40%.

However, this looks more like a short-term bounce than the start of a long-term recovery, says Heinz Ruettimann of Julius Baer, a private bank. The fundamentals, while very gradually improving, are hardly impressive. Russia has fallen into recession largely due to the collapse in the oil price: oil and gas account for around 60% of exports and 40% of state revenue, so the low oil price has undermined investment, confidence and consumption. International sanctions imposed by Western countries in response to Russia's destabilisation of Ukraine have also squeezed the economy. Hence GDP fell by 3.7% in 2015. Economists surveyed by Bloomberg expect a 1.5% contraction this year and a return to growth in 2017.

Oil has now rebounded, but it may be a very long time before it is back to the levels the economy needs (the government has said that it requires around $80 per barrel to balance its budget). In the meantime, the fall in the ruble has gradually improved the country's competitiveness. Exports rose by an annual 10% in the fourth quarter of 2015.

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However, this has also bolstered inflation and inflation expectations, which is stopping the central bank from lowering interest rates to boost growth. Last month it kept interest rates at 11% to tame inflation it had been edging down, but is still more than twice the bank's medium-term 4% target. To make matters worse, structural reforms to raise the economy's speed limit, such as beefing up property rights and infrastructure, and reducing regulation, have been neglected. Russia's rally looks like too much, too soon.