Russia’s economy may not grow at all this year as it feels the impact of the financial crisis and the government will probably increase support for banks to ensure their liquidity. With the government’s gross domestic product growth forecast ranging from zero to 2 percent, inflation will remain high at 13 percent this year, well above a government forecast last November for 8 percent inflation in 2009. Expected falling demand will push oil prices below the International Energy Agency’s forecast of just over $40 a barrel for 2009. The drop in price meant Russia will be facing a bigger challenge than many other countries even though the oil price is not as low as 10 years ago.

The country remains committed to liberalising its financial markets but the financial crisis showed that some sectors should be better regulated and there should be greater auditing. Russia’s retailers faces a hard landing in 2009 as the country lurches toward recession but the downturn also offers global majors an easier entry into a sector with more potential than many mature markets. Many retail giants that missed earlier chances to participate in the 15-year spending boom - and whose balance sheets still provide financial firepower for deal-making - can now opt to enter at a time when Russian assets are cheaper. The country’s largest food retailers, X5 and rivals Magnit, Dixy Group and Seventh Continent have lost 60 to 80% in value over the past six months as Russian stocks were hit by the falling oil price and capital flight from emerging markets.

Analysts anticipate faster growth in Russia than in most European countries although the global crisis has now spread into the real economy, ending one of the longest consumer booms in Russian history. The economic crisis has led to rising unemployment, slower income growth and limited credit access for most consumers. Obviously purchasing power is also declining, but discount chains such as Wal-Mart are well placed to profit from the situation as their formats will be very popular in the crisis. A credit squeeze triggered by the global crisis has hit both the food and non-food retail sectors, which some analysts say could accelerate consolidation inside the fragmented industries. Russia’s largest food retailer in revenue terms, the X5 group, is widely expected to buy up smaller chains threatened with bankruptcy.

Despite current crisis conditions, Russia is still among the fastest growing retail markets, with population sizable enough to influence the portfolio of a global retailer. Many Russian retailers are cutting capital expenditure and expansion this year to free up cash for debt repayments. They also anticipate deterioration in consumer sentiment in Russia. Official data for all of 2008 is not yet available. November monthly data showed Russian retail sales were up eight per cent year-on-year. This was the slowest annual growth rate in five years and a 3.4 per cent fall on October.

The data shows obvious signs of consumer confidence weakening. The slowdown in retail sales ... is the beginning of a trend in growth rates (in ruble terms). In November, real disposable income contracted by 6.2 per cent compared with a year earlier. Wage arrears doubled between October and November, affecting 600,000 people. The current crisis situation has brought to an end the consumer boom in Russia and will lead to almost zero real disposable income growth in the near future, as companies are laying off people and reducing salaries.

Other non-economic, but no less important factors, that also make us bearish on consumer spending include people’s uncertainty over financial stability and job security. Analysts warily forecast the market may begin to recover in the second half of 2009 if a global turnaround takes off. Analysts say some grocers, notably the low-price chains, are better placed to weather tough condition than retailers of discretionary items such as cars and electronic items.

The Russian authorities have yet to release a detailed plan of how they would fill the hole in the budget presented by tumbling prices. Taxes on oil and gas finance about 60 per cent of the government’s annual budget. The country will run a deficit this year if crude oil prices remain below $70; they are now about half that. It is expected that the country will run a budget deficit of between 1.5 trillion and 2.5 trillion roubles ($88.25 billion) or up to 6 percent of the country’s gross domestic product (GDP).

Russia’s gold and currency reserves stand at $438 billion. The World Bank expects Russia’s reserves -- which have already shrunk by a sixth in the last three months to $475 billion, largely due to official efforts to prop up the rouble -- to fall by no more than another $100 billion during 2009. Once large foreign currency reserves are increasingly committed to defending the ruble and are running out; the central bank has spent $162 billion since midsummer and still was forced to devalue the ruble three times recently.

Further weakness in the Russian rouble looks inevitable. The World Bank has halved its forecast for 2009 economic growth. The Bank predicts the economy to grow 3 percent in 2009, compared with pre-crisis forecasts of 6.5 percent, due in part to the collapse in world oil prices from their July peak around $147 per barrel. The weakness of the oil market, the capital outflows and the weakening current account situation will continue in the short term. While Russia’s strong short-term macroeconomic fundamentals make it better prepared than many emerging economies to deal with the crisis, its underlying structural weaknesses and high dependence on the price of a single commodity make its impact more pronounced than otherwise.