Russian economy to slow in 2012. The next year looks perplexing for Russia because on one hand the Russian economy will be negatively affected by global deceleration as a result of European debt problems, while on the other hand it will benefit from domestic policy. Although the risks of things spiraling out of control in Europe are tangible, we believe that European countries will find a resolution to the crisis. Still, global deceleration will affect Russia through a decrease in exports and deceleration in credit growth. Considering that the main driver of Russia’s economy is domestic demand, deceleration in credit is particularly worrying. Nevertheless, the economy will benefit from a social security tax cut and decrease in regulated tariff growth, which will support real incomes and capital investment as well as to help combat inflation. Taking everything into consideration, we downgraded our outlook on the Russian economy, as we expect lower economic growth, deceleration in industry and capital investment, a weaker ruble, and a larger budget deficit.

Long-awaited accession to WTO - too late for gains. In the summer of 2012 Russia will finally join the WTO. While this is undoubtedly a much anticipated event, its economic gains will be minimal. This is primarily because of the following: tariff reductions are moderate in size; for many sectors, WTO provisions preserve the status quo; and finally, during18 years of negotiation, Russia has lost many of the comparative advantages (such as cheap energy and labor) that it had in the 1990s. Thus, WTO accession will not lead to any tangible improvements in the economy in the medium term, although some moderate long-term gains can be expected from a gradual improvement in business and investment climate.

Europe will finally stand, but political risks remain high. We believe that European countries will find a way to resolve the debt crisis. However, political risks remain high, which creates substantial indeterminacy about the future of global economy.

Global deceleration will hit Russia via exports and credits. Exports will be stagnant in 2012 – $522.3 bln in 2012 v $512.7 bln in 2011 – due to weaker commodities. We also expect deceleration in credit growth both to industry and private individuals.

Social security tax cut and regulated tariff reduction to benefit the economy. The reduction in social security tax will benefit Russia’s economy via capital investment and real incomes, while the reduction in the regulated tariff will help combat inflation.

Global volatility fuels capital outflow and drags down the ruble. Capital flight surged in autumn on the back of global volatility, leading to ruble depreciation, despite vis-à-vis resilient oil prices.

Russia will join WTO in summer 2012. The WTO accession will be neutral for the country because negotiated tariff reduction is moderate, many sectors preserve the status quo, and because Russia lost its initial comparative advantages such as cheap labor.

Russia to grow moderately in the long term. The coming years promise stability but preserve key structural economic problems such as resource dependence, weak institutions, and poor investment climate.

Should Europe fall Russia will not stand either. A quantitative assessment on what impact a deeper global deceleration (due to the quite pronounced recession European) will have on Russia suggests that Russia will slip into a mild recession in 2012 followed by a strong recovery in 2014-15.