Oil prices will be higher but GDP will grow more slowly, according to the Russian Economic Development Ministry’s updated 2012-2015 socio-economic forecast.

The main changes to the forecast, which still has to be discussed with the Finance Ministry, the Central Bank, and other agencies, are for the current year: the average oil price has been raised to $115 from $110 a barrel in 2012.

But oil is no longer the driver of economic growth – the GDP growth forecast has been lowered 0.3 pp to 3.4% from 3.7%, and industrial output growth to 3.1% from 3.6%, due to the declining forecast for growth in investment demand to 6.6% from 7.8% and a higher estimate for import growth in real terms.

Expectations for consumption rise to 6.3% from 5.5% in 2012, making the overall forecast more “consumer-oriented.”

The higher oil price forecast this year is the main reason for the now stronger rouble forecast, which is expected to average at 29.2 roubles/$1 in 2012, compared with a previous forecast of 31.1 roubles.

GDP growth of 3.8% is expected in 2013 (previous forecast: 3.9%), 4.4% in 2013 (unchanged), and 4.7% in 2015.

Industrial output could rise 3.4% in 2013 (previous forecast: 3.8%), 4.1% in 2014 (unchanged), and 4.2% in 2015.

The inflation forecasts are unchanged at 5-6% in 2012, 4.5-5.5% in 2013, and 4-5% in 2014 and 2015.

External environment

The Economic Ministry raised its 2012 Urals crude average forecast to $115 per barrel from the $100 it was predicting in December. The 2013 and 2014 forecasts are unchanged at $97 and $101, respectively, but the Ministry considers these to be conservative forecasts and actually expects prices to be higher than that. The 2015 forecast is $104 a barrel.

As usual, the Ministry has drafted two other scenarios. The best-case scenario has oil trading at $125 a barrel in 2012-2013 before falling to $115 in 2014 and rising again to $120 in 2015. The worst-case scenario is for oil to fall to $80 a barrel in 2013 and hold at $82-$85 until 2015. But the Ministry does not think this very likely in today’s conditions, when OPEC is playing an increased role and is unlikely to allow such a price drop.

“Most changes apply to 2012. The price of oil is currently even higher than in our last best-case scenario. We’re forecasting $115 on the assumption that oil will fall to $102 in H2,” Deputy Economic Development Minister Andrei Klepach told reporters.

“So far we’ve left oil as it was in the baseline forecast for the budget in 2013-2014, but it is more likely that the price will be higher even in the conservative scenario,” Klepach said. “We’ve left $97 for 2013, because these are the main parameters for forecasting the budget. Secondly, there’s still time before September to see what changes will take place in the market and then make an adjustment. For now we think oil will be higher, but not that much higher – probably around $100,” he said.

Klepach said $100-110 “is the price that is comfortable enough for both for producers in Saudi Arabia and for oil consumers.”

“More than $110, and the market overheats somewhat due to the Iranian and other risks. This would have a slowdown effect, in view of the stagnation in the European economy, so I don’t think that level would hold for long. Oil prices should fall unless there are any sudden military events,” Klepach said.

The global economic outlook is also unchanged, with stagnation in the eurozone, relatively sustained growth in the American economy with expected deceleration in 2013, and a downward trend in Asia, especially China, but considerably  higher than 7% per year.

“This all gives the Russian economy a relatively comfortable environment for the next few years,” Klepach said.

Domestic environment

Klepach said that “domestic demand is growing fairly robustly, although its structure differs a little from what we expected.”

“We saw last year – and we have factored this in for this year – a swing towards domestic consumer demand, so we have also raised our retail trade forecast. The 2012 forecast rises to 6.3% from 5.5%, but from then on it falls a little due to the base effect.  But growth will still be above 5%, in other words there’ll be fairly strong consumer demand,” Klepach said.

But the forecast for investment demand in 2012 has been lowered “largely due to the base effect and because investment demand is recovering fairly shakily for now,” Klepach said.

There are risks that investment growth will be lower than 6.6% in 2012 “if, for example, Gazprom’s investment program stays as the company announced, without substantial adjustments.” “In our new forecast we assume Gazprom will not let investment fall by the 30% or so that is so far expected,” Klepach said.

Klepach said the forecast does not reflect the additional rates increase that Gazprom has proposed. “We consider there are currently no grounds for changing the rates forecast. But there is the issue of adjusting Gazprom’s investment program, including where the investment will go – what will be spent on export infrastructure, and what will be spent on existing infrastructure. What they have for 2012 is low, and we work on the assumption that Gazprom will be investing more. It has the opportunity to fund this, both with increased borrowing and internal resources,” Klepach said.

The Economic Ministry expects investment to grow in the oil sector and a positive trend to emerge in manufacturing and agriculture.

“But the risks attached to the Gazprom investment program could mean that investment will grow not by 6.6% but by far less – around 4%-5%, Klepach said.

Investment growth should be above 7% again in 2014-2015, “but provided not only that private investment growth accelerates, but also that there are constructive initiatives on the state’s part, primarily in transport infrastructure, where even with the regional budgets there are no sustained positive dynamics yet.”

Klepach also said the personal income growth forecast has been raised in 2012 to 5.0% from 4.8%. “This reflects the effect of higher wages for servicemen in 2012 and Vladimir Putin’s proposals to raise public sector wages for professors and lecturers, scientists and health care workers,” he said.

The Economic Ministry has revised its 2012 average rouble exchange rate forecast to 29.2 roubles/$1 from 31.1 roubles/$1. The forecast has been revised to 29.70 roubles from 31.30 roubles for 2013, and to 30.50 roubles from 31.80 roubles for 2014. The forecast for 2015 is also 31.50 roubles.

The revised forecast projects that the rouble’s real effective exchange rate will strengthen by 4.4% in 2012 instead of 0.2% as previously projected, weaken by 0.2% in 2013 instead of being strengthened by 1.6%, weaken by 1% instead of 0.4% in 2014, and weaken by 1.5% in 2015.

The import forecast in nominal terms is raised to $370 billion from $369 billion in 2012, lowered to $407 billion from $413 billion in 2013, and to $445 billion from $452 billion in 2014. Forecast imports stand at $485 billion for 2015.

Import growth in real terms is raised to 12.5% from 11.4% for 2012, lowered to 8.1% from 9.7% in 2013 and 7.8% from 8.1% in 2014, and expected to be 7.2% in 2015.

The export forecast is raised to $558 billion from $513 billion in 2012, to $526 billion from $515 in  2013, to $551 billion from $543 billion in 2014 and stands at $581 billion in 2015.

Exports will grow more slowly than imports in real terms: by 2.3% in 2012 (2.0% in the previous forecast), 2.8% in 2013 (2.3%), 2.2% in 2014 (2.0%), and 2.5% in 2015.

The Economic Ministry now expects the current account to be in deficit not in 2014 but in 2015. It forecasts a current account surplus of $83 billion in 2012, $23 billion in 2013, and $6 billion in 2014, as well as a deficit of $9 billion in 2015.

Net capital outflow of $10 billion-$25 billion is expected in 2012.

“We believe that with such a large outflow in the first quarter – and apparently this inertia could continue in April – we are unlikely to fully offset it. Therefore, the outflow for the year could be $10 billion to $20-$25 billion,” Klepach said.