With the oil price plunging to new depths (Brent in mid 30s), the Russian economy has been deteriorating with the rouble now trading at 75 for one dollar. Given Russia’s high dependency on hydrocarbons, its fiscal position is strained and its economy is in recession, obviously aggravated by the sanctions from the EU and the U.S. The IMF estimates that GDP in 2015 contracted by 3.7% year over year and projects a further contraction of 1.0% (still optimistic, in our view) for 2016. As the government’s finances are highly dependent on oil revenues, the country is facing a fiscal deficit. Although part of the blow due to low oil prices is cushioned by the depreciation of the rouble (the oil price in roubles is quite stable), cuts in social spending (pensions) now seem inevitable as the budget is strained by a costly war in Syria and an expensive occupation of Crimea. The fiscal deficit for 2015 is estimated at -3.0% and for this year it won’t be much lower unless the oil price recovers (the state’s budget assumes an average oil price of USD 50 per barrel).

However, Russia still has ample reserves of USD 310 billion (thanks to sensible monetary policies by letting the rouble float) and low public debt of 13% of GDP. Russian companies went into the crisis in 2014 with relatively low debt levels and have been repaying debt ever since, helped by exports in dollars and costs mostly in roubles. Russia’s steel companies are probably unique in the world by generating ample free cash flows. Only banks had a difficult time but were helped by capital support and regulatory forbearance; the large banks now seem to have ample dollar liquidity. Russia’s current account is decidedly in positive territory (+4.3% in 2015) and probably will remain so for some time to come. Debt amortizations this year and next are quite manageable. However, the economic pain is real and especially pensioners and people with low education are hurt.

Russia needs to reform its economy, diversifying away from hydrocarbons. But not many companies or investors have the urge to put money at work in Russia, given the degradation of the rule of law and property rights in the country and – for foreign investors – the sanctions regime that is still in place. FDI inflows have been negligible in 2015 and will most likely remain so this year. It is difficult to see how Russia will move on and implement structural reforms with president Putin still in a defying mode on geopolitical issues. So, Russia most likely will remain in bear market territory for some time longer.