英文原文：Low oil prices threaten fragile stabilisation
The economic situation has stopped deteriorating since July. But downside risks are very high due to the drop in international oil prices. Yet as long as oil prices hold at a very low level, any hopes of recovery are bound to lead to disappointment. Currently, a "slight improvement" can be seen, notably on the corporate side, while the household situation remains extremely fragile. The Russian economy should be able to meet its commitments in the short term. By 2017, however, it could become much harder to finance the budget deficit since the reserve fund will no longer suffice to fully cover the deficit, unless the government sharply cuts back spending, which risks placing a severe strain on growth. This problem could emerge before if oil prices remain below USD 50.
Fragile improvement in business climate
The Russian recession seems to have bottomed out in Q2 2015. Although statistics concerning GDP growth trends can still be confusing from one quarter to the next （depending on the base year used）, activity seems to have contracted less in Q3 than in the previous quarter （-0.6% q/q in Q3 2015 vs. -1.3% in Q2 2015） and the previous year （-4.1% y/y in Q3 2015 vs. -4.6% in Q2）.
Increasing production in the agricultural sector was the main economic support factor as the consumption of local products replaced imported goods. Apparently this improvement continued in Q4, since farm production was up 3% y/y last October. On the whole, even though industrial production continued to contract （- 3.5% y/y in October）, the improvement first reported in June seems to be continuing.
Household consumption continues to be hard hit by persistently high inflation, despite a slight deceleration （+14.9% y/y in November vs. +15.8% in July）, and by declining real wages, even though this trend eased slightly in November （-9% y/y）. As a result, retail sales contracted again, down 13.1% y/y in November.
Inversely, the corporate situation has ceased to deteriorate, notably in industry. Business leaders are more confident, at least according to survey results in the manufacturing sector. Manufacturing PMI was above 50 in November, for the second consecutive month, even though it declined again in December. Corporate investment was up 3.1% in November compared to the year-earlier period. Although this upturn might seem a little premature, there has been a real change of pace since July （when the decline reached -8.5% y/y）. Moreover, corporate earnings were generally higher in full-year 2015 than in 2014.
Yet despite this “slight improvement” in industry, growth prospects are hardly favourable in the short to medium term. Activity will continue to be squeezed tightly by several factors: 1） oil and basic metal prices are not expected to rise significantly over the next twelve months （even though the decline will be partially offset by the rouble’s depreciation against the dollar）, which should affect investment decisions in these sectors, 2） lending conditions are not very favourable （the problem is not really with real interest rates, which are still negative, but the banks, which are reticent to lend）, and 3） real wages are still declining, since inflation continues to outpace nominal wage growth.
In a nutshell, the situation remains extremely fragile, especially if oil prices hold at year-end levels.
The 2016 budget was accepted in the final reading by the Duma last December. The budget calls for a federal deficit of 3% of GDP entirely financed by drawing on the reserve fund. So far, the budget does not seem to be built on realistic assumptions. The government is anticipating full-year growth of 0.7%. It is also forecasting oil prices at USD 50/barrel （at RUB 63 per USD）, which seems extremely optimistic with regard to current prices. Moreover, due to the drop in international oil prices, the government announced that the budget should be revised in Q1-16. Disregarding the size of the deficit, what is really alarming is the decline in the reserve fund. At 1 December, there was only USD 60 bn in the reserve fund, USD 30 bn less than in the previous year. Under these conditions, the reserve fund might not suffice to finance the entire deficit in 2017, which could become problematic if Russia's political situation continues to prevent it from accessing financing on international markets. But, from 2016 onwards, this problem could surge if international oil prices stagnate at current level.
Investment shortfall: a key factor behind the decline in Russia's growth potential
Looking beyond the crisis currently sweeping Russia, what is truly alarming is the erosion of potential growth. The consensus among economists estimates Russia's potential growth at about 1% or even 1.5%, although some estimates are closer to 0. Prior to the 2008 crisis, in contrast, Russia's growth potential was estimated at about 7%. This downward revision is only partially due to changes in the active population. The main cause is the lack of investment and the feeble diffusion of technical progress.
Investment in productive capital has fallen far short of what is needed to support growth, a problem that has persisted for several years. According to the US Conference Board, capital contributed only 1.7 percentage points （pp） to Russian growth over the period 2007-12, and only 0.5 pp in 2014, before the impact of sanctions. In the other emerging countries, in comparison, capital made an average contribution to growth of 4.3 pp in 2007-12 and 4.4 pp in 2014.
Moreover, unlike many other emerging countries, Russia did not benefit from major technological transfers via FDI, notably in the non-mining sectors. Consequently, the lack of productive investment （domestic and foreign） triggered a net slowdown in Total Factor Productivity （TFP）, which rose by an average of only 0.8% over the period 2007-2012, down from 4.7% in 1996-2006. TFP made a negative contribution to growth of 0.2 pp in 2014.
Investment's contribution to growth is structurally weak in Russia compared to the situations prevailing in the other emerging countries. This can be explained in part by an especially unfavourable institutional environment, at least until recently. According to the World Bank's latest reports, the government seems to have managed to improve the business climate through a series of reforms. Yet the improvement in the business environment is not enough to offset the deterioration in corporate financial positions reported since 2012, which is the real source of the slowdown in investment.
Investment as a whole first began to slow in Q1 2012, before contracting very sharply as of Q3 2013. In other words, the slowdown began well before the 2014 crisis, the implementation of international financial sanctions and the drop-off in oil prices. An unfavourable combination of events only worsened the economic situation, which began to deteriorate as of 2011. The decline in investment was even more pronounced if we excluding housing investment.
The significant slowdown in investment can be attributed to 1） smaller revenues due to the drop-off in commodity prices, and 2） the shift in the sharing of value added in favour of wages.
Corporate earnings slowed as of 2011 before declining as of mid- 2012. This slowdown is due in part to the fall of commodity prices and to rising production costs, notably the cost of labour. Wages rose much faster than productivity gains in all sectors of activity through year-end 2013. Between 2003 and 2013, there has been a continuous increase in the gap between wage growth and productivity gains.
At the same time, banks have become more risk adverse, particularly towards small businesses.
Capital investment by the government depends mainly on fiscal revenues, which are highly correlated to oil pricing trends. Unfortunately, as the government pointed out in its 2016 budget presentation, however, this investment is not part of "essential" spending. It has declined since 2012, in keeping with the levelling off and then decline in oil prices. In 2014, investment accounted for only 0.2% of GDP vs. 0.5% of GDP in 2015.