Expectations Fall Sharply Following Extension of Sanctions

Lower borrowing costs failed to prevent Russian business sentiment from falling slightly in July, although confidence remains in positive territory and still tentatively suggests that the worst of the economic slowdown may have passed.

The MNI Russia Business Sentiment Indicator fell by 1% to 51.3 in July from 51.8 in June, offsetting last month's rise and leaving it at the same level it was in May. Companies in the service sector were more optimistic about business conditions in July, while both construction and manufacturing firms were unchanged in their attitude from the previous month.

Companies were far less optimistic in their near-term outlook, with the Future Expectations Indicator falling by 13.2% to 53.2 in July from a 22-month high of 61.3 in June. Much of this is likely to have been driven by the recent extension of EU sanctions against Russia, while the sharp fall in the oil price was also likely to have been a contributor.

Kremlin (PD)Inflationary pressures continued to ease in July, with both the costs faced by our panel and the prices they charged falling to the breakeven 50 level, a further sign that inflation has peaked.

Firms took the weakening of the rouble over the past month as a positive, reporting that the exchange rate had no effect on their operations in July, having caused them pain during the previous nine months.

Last month's rate cut by the Central Bank of Russia may not have managed to provide a floor under overall sentiment, but companies reported that credit was more easily available even though capital restrictions remain in place.

Commenting on the latest survey, Philip Uglow, Chief Economist of MNI Indicators said:

"Sentiment was broadly flat over the month and other elements of the report showed minor changes. Importantly, most of the key indicators remained in expansion and are significantly higher than the lows seen in February. We take this as an early sign of stabilisation and recovery in the Russian economy."

"Subsiding inflationary pressures, meanwhile, provide the central bank with room to further normalise monetary policy at its meeting later this month, with a rate cut of 50 basis points the most likely outcome by our reckoning."

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