Updated Dec. 16, 2016 8:40 a.m. ET
Whether it is Ukraine, Syria or allegations of hacking the U.S. presidential elections, Russia has been making waves geopolitically. But economically, it has been following the textbook. That mix has paid off for investors.
Russia’s economy was hit by a double shock of sanctions over Ukraine and the collapse in oil prices. It has been the recovery in oil—still the biggest swing factor for the economy—that has been key in getting Russia out of an economic hole.
Russian policy makers also deserve some credit. Fitch Ratings, which in October lifted Russia’s outlook to stable from negative, noted a “coherent and credible policy response” that “stands out relative to those of other oil producers similarly affected by the oil price shock.”
One key player has been the Central Bank of Russia, which Friday held interest rates at 10%. In December 2014, faced with a collapse in the ruble and rising inflation, it took rates to 17%, following a classic central-bank template. Even with inflation falling back, it has remained cautious: Friday it said it would consider a rate cut in 2017, but that is clearly contingent on inflation heading toward the 4% target.
True, Russia’s economic outlook is still weak. Growth is forecast at around 1% next year, though the latest data suggest gathering momentum. The Russian manufacturing purchasing managers index rose to its highest in more than five years in November.
Investors have already been rewarded. The ruble is up 18% against the dollar this year, and remarkably has rallied even since the U.S. elections. Russia’s Micex stock index is up nearly 27%. Russian dollar-denominated bonds have returned 11% this year, according to a Bloomberg Barclays index.
Politics will matter in 2017, with the election of Donald Trump potentially changing the U.S. relationship with President Vladimir Putin. A reset in U.S.-Russian relations could propel Russian asset prices higher, but it is Russian economic policy has given investors a base to build on.
Write to Richard Barley at [email protected]