RUSSIA'S MACROECONOMIC OUTLOOK

The WSJ reports that Russia's economy recorded nearly 10 percent output contraction in Q1:2009 (link). In spite of surging oil prices and strong increases in stock market index, the midterm macroeconomic outlook on Russia is not favorable in terms of economic growth, fiscal policy and macroeconomic recovery. While the local currency appreciated 0.3 percent against the U.S dollar (link), the slow recovery in the financial sector is likely to deteriorate the macroeconomic outlook. The main ailing problems of the financial sector remain high credit and liquidity risk as well as default risk. The central bank could possibly mitigate the shocks in the financial sector by building up foreign reserves to act as the lender of the last resort. However, Russia's persistent obstacle to macroeconomic stability is high inflation rate and dismal fiscal policy record. When the inflation rate is high, building foreign currency reserves may be risky, letting domestic currency overvalued. Reduction in public spending and tightening of the monetary policy to stabilize the inflation rate could essential pursue stable midterm outlook.