Bank of America sees signs of recovery in Russian economy

September 28
6:40 PM 2015

Bank of America Corp (BofA) has turned positive on Russia's economy as it started seeing signs of recovery in near future though on a weaker note.

The drastic slowdown in capital investment is gradually easing off. Russian economy seems to have bottomed out. Russian gross domestic product (GDP) shrunk 4.6 percent during the second quarter.

The marginal improvement in corporate spending is expected to lead the recovery process. Russian economists say that stabilization in the economy is more important than the weakness in consumer demand. The encouraging growth of corporate profits at 43 percent in the first half of 2015 amid recession is further giving confirmation on the recovery in the near future.

Despite the recession in the Russian economy and continuous drop in oil prices, the corporate profits have been moving upwards. Russian corporate sector registered a profits growth of 43 percent in the first half this year and grew 38 percent during first seven months from January till July 2015. 

Vladimir Osakovskiy, Chief Economist at Bank of America, said: "Corporate profits in Russia are quite good year-to-date and we look at robust growth in corporate profits as the main potential driver of stabilization and recovery in near future."

Bank of America foresees that main macroeconomic indicators will improve during the last quarter of this year. It takes time to see the end results of improvement in capital investments emerging from corporate profits. 

Ksenia Yudaeva, Deputy Chairman of Central Bank of Russia said the downturn in the economy will last for only a few quarters. Russian economy needs structural reforms to bring back the economic growth. The country requires flexibility in labor and product markets.

Lower oil prices were the major reason for sluggishness in the Russian economy, said Deputy Minister of Finance Maxim Oreshkin. The Russian economy will start seeing recovery and growth from the first quarter of 2016 and onwards.

The economy growth resumption was likely to happen in 2015, but a slump in oil prices impacted the economy in a negative way.

Russian Micex index is trading 5.2 times the projected earnings, making it the cheapest among the emerging markets. With the rising profits, corporate companies are likely to take up expansion plan, forecast analysts. The attractive valuations and cheaper stocks enable Russian markets to get funds inflow in the near future.

The rise in profits will enable corporate firms to invest more in the future. This will further add to the economy thus improving the spending capacity. Considering the low oil prices, oil is the major export revenue earner for Russia, Bank of America is neutral on Russian markets.

The stocks of Russian corporate companies are weaker in the sluggish financial markets owing to the lower valuations. However, Russian financial markets turned attractive when compared with other emerging markets. This factor is likely to attract more investments into Russian capital market.

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