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Issue 35 | July 2016

Global Economics Monthly

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Russia’s False Dawn

Robert Kahn, Steven A. Tananbaum Senior Fellow for International Economics

Bottom Line: Summer has seemingly brought a new optimism about the Russian economy. Russia’s economic downturn is coming to an end, and markets have outperformed amidst global turbulence.  But the coming recovery is likely to be tepid, constrained by deficits and poor structural policies, and sanctions will continue to bite. Brexit-related concerns are also likely to weigh on oil prices and demand. All this suggests that Russia’s economy will have a limited capacity to respond to future shocks.

Recovery’s Green Shoots

Summer has seemingly brought a new optimism about the Russian economy. Markets have soared: the ruble is the best-performing emerging market currency this year, up over 20 percent since late January against the dollar, and equities have posted double-digit gains. Russian markets have benefited from a range of macroeconomic and technical factors—a moderate pickup in oil prices, a search for yield by investors punished by low or negative interest rates in the industrial world, and a sense that the worst effects of the sanctions are in the past. Also, perhaps counterintuitively, sanctions themselves have provided support for asset prices by limiting (until recently) new issuance from Russian corporations and the government and reducing the supply of investible assets as maturing bonds are repaid. Last month’s decision by the central bank to cut interest rates for the first time since August 2015, and the hope of more cuts to come, has further boosted demand for domestic assets while reducing pressure for appreciation of the ruble. More recently, Brexit concerns had little impact on Russian markets, as the country was seen as largely insulated from global financial market contagion following its turn inward in recent years.

At the same time, there are recent signs of stabilization in the economy. Growth in the first quarter was down 1.2 percent compared to last year, consistent with a bottoming out of the economy in early 2016. Activity has been boosted by improved consumer spending, as well as a shift toward domestic demand and away from imports. Capital outflows also have slowed significantly, helped by firmer oil prices, and the fiscal deficit has been contained (see figure 1). A number of market analysts are predicting that growth will turn positive in the second half of the year, producing full-year growth in 2017 on the order of 1.5 percent after three years of recession. Both the International Monetary Fund (IMF) and World Bank also have recently upgraded their forecast and complimented the government and central bank for their strong macroeconomic policy management—including a flexible exchange rate regime, banking sector capital and liquidity, sensible fiscal policies, and regulatory forbearance to keep lending going. 

Adding to the optimism is a growing expectation that European sanctions will be eased when they are next up for renewal at the end of 2016. During the June 2016 decision by the European Council to renew the financial, energy, and defense sanctions for another six months, council members reportedly disagreed over the future course of sanctions policies and many members felt that full compliance with Minsk II, the political framework for addressing the conflict between Russia and Ukraine, was not going to be an effective test for future decisions on sanctions.

These are the building blocks of an improving outlook. But I have a less sanguine view: Russia’s recovery may not be enough to bring the country out of its protracted economic crisis. Read more »


Looking Ahead: Kahn's take on the news on the horizon


Attention now turns to informal discussions that could set the stage for a British invocation of Article 50 (beginning the formal exit process) before the end of the year.

Italian Banks

The Bank of Italy’s stress test will likely reveal a large capital hole in major Italian banks, forcing a confrontation with European leaders over whether a government injection of capital will require a bail-in of these bank’s private creditors.

Interest Rate Cuts

The Bank of England has held back on a rate cut, for now, but the Bank of Japan and European Central Bank meet with interest rate cuts on the table amid growing concerns of a Brexit-induced slowdown.



Turkey’s Shaky Economy: a Local or Global Concern?

Robert Kahn 

Emerging markets have held up impressively in the aftermath of the Brexit vote last month. Turkey’s importance in global markets on the surface appears small relative to factors like Brexit, so it's reasonable to expect that Turkish markets eventually will find their footing and the risks will remain local. But any sense of a significant economic problem in Turkey, an important and liquid emerging market, could pull an important prop out of the benign emerging market story. That could be the economic legacy of this weekend’s events. Read more »

Brexit’s Threat to Global Growth

Robert Kahn 

Thursday’s Brexit vote wasn’t a “Lehman moment”, as some have feared. Instead, it was a growth moment. And that may be the greater threat. If policymakers respond effectively, the benefits could be substantial: a stronger global economy, and an ebbing of the political and economic forces now pressuring UK and European policymakers. Conversely, failure to address the growth risks could cause broader and deeper global economic contagion. Read more »

Britain’s Bold Leap into the Unknown

Robert Kahn 

Britain’s vote to leave the European Union was fueled by a broad range of social and political concerns, including a fear of immigration, resurgent nationalism, and a populist rejection of UK and European policies, institutions and policymakers. But it is also an extraordinary economic experiment. Read more »



The Maurice R. Greenberg Center for Geoeconomic Studies (CGS) works to promote a better understanding among policymakers, scholars, journalists, and the public about how economic and political forces interact to influence world affairs.

Michael A. Levi
Director of the Maurice R. Greenberg Center for Geoeconomic Studies

Edward Alden
Bernard L. Schwartz Senior Fellow

Thomas J. Bollyky
Senior Fellow for Global Health, Economics, and Development

Willem H. Buiter
Adjunct Senior Fellow

Blake Clayton
Adjunct Fellow for Energy

Heidi Crebo-Rediker
Senior Fellow

James P. Dougherty
Adjunct Senior Fellow for Business and Foreign Policy

Jennifer Harris
Senior Fellow

Miles Kahler
Senior Fellow for Global Governance
Robert Kahn
Steven A. Tananbaum Senior Fellow for International Economics

Sebastian Mallaby
Paul A. Volcker Senior Fellow for International Economics

Meghan L. O'Sullivan
Adjunct Senior Fellow

Peter R. Orszag
Adjunct Senior Fellow

Kenneth S. Rogoff
Senior Fellow for Economics

Varun Sivaram
Douglas Dillon Fellow

Matthew J. Slaughter
Adjunct Senior Fellow for Business and Globalization

A. Michael Spence
Distinguished Visiting Fellow

Benn Steil
Senior Fellow and Director of International Economics
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