This article originally appeared in BNE Intelinews

Things are pretty grim in the Russian economy, but some of the country’s leading economists are wondering if Russia Inc has turned the corner some 10 months after the biggest devaluation of the ruble since the 1998 crash.

“September seems to have been the starting point of Russia’s economic recovery. If these trends continue in 4Q15, 2016 could be a strong year, and we think GDP growth of 2.5% would be realistic. However, for this to be the case, the [central bank] would have to be neutral on the FX market, which would protect the economy against rapid ruble appreciation,” Evgeny Gavrilenkov, chief economist at the state-owned banking giant Sberbank said in a note on October 21.

The trends he is referring to were better-than-expected industrial production and investment results published at the start of the same week by Rosstat, which “point to an upturn”.

Several sectors saw growth after months of falls. Agriculture expanded 4% year on year (y/y) in September, putting the nine month tally at 0.4% y/y. Freight transportation (an excellent proxy for overall economic activity) increased 0.8% last month, but the nine-month growth was still negative (albeit improved) at -1.1%.

Formally, retail sales sank 10.4% y/y in September, in line with a 9.7% decline in real wages. High inflation (15.7% y/y) was the reason for the significant drop in both indicators. However, when adjusted for seasonality and calendar days, retail sales were flat month on month (m/m) in the second and third quarter, Sberbank reports.

“We think the official statistics may have exaggerated inflation in 3Q15. As we have noted previously, high m/m inflation in August was driven by the foreign tourism segment (thanks to ruble depreciation), though the tourism statistics indicate a drastic decline in demand for this service. This shift in demand does not seem to have been included in the CPI calculation, which elevated the inflation figure. If this is indeed the case, real wages and retail sales would have been undervalued in 3Q15,” Gavrilenkov believes.

Alfa Bank’s Natalia Orlova was in the middle of these positions. While she acknowledged the improvement in investment and the deterioration of retail, she believes that the economy remains “frozen”, as it will have to cope with an austere budget in 2016 and state spending remains the major economic driver.

“The outlook [for Russia’s economy] remains frozen due to the deterioration of lending activity in September, as well as the cabinet’s decision to unveil a tight 2016 budget draft, likely pushing the real sector toward austerity,” Orlova said in a strategy piece the same week as the data releases. “But the modest 3.7% y/y decline in September industrial output (3.2% y/y for 9M15) and surprisingly upbeat 5.6% y/y contraction in investment suggest that Russian producers are playing a key role in limiting the contraction in economic activity.”

Banks stabilize

There was some good news elsewhere too. After being crushed by the emergency interest rate hike to 17% by the Central Bank of Russia (CBR) last December, the banking sector seems to have stabilized. Retail deposits started to rise again in the summer, providing banks with some desperately needed fresh capital.

More importantly, the CBR’s assistance to the bank sector – the central bank is currently the only real source of capital thanks to sanctions – seems to have peaked in the summer. In the depths of the 2008-09 global crisis, the CBR share of bank funds rose to a maximum of 3% of total capital. At the start of last year the CBR already accounted for 11% of capital and this rose to a peak of 15% this summer. However, in the last three months the share has started to fall again, suggesting the worst is past. Both corporate and retail lending began to grow modestly over the summer for the first time in over year. "We expect the situation in the banking sector to remain stable next year, with banks gradually boosting lending as they’re supporting the economic growth," CBR governor Elvira Nabiullina said on October 21.

Part of the reason for the improvement in the health of Russia’s banking sector is that companies seem to be approaching the end of their deleveraging process. Cut off from the international capital markets, banks and companies have been forced to pay down debt rather than refinance it. Those obligations have been driving much of the capital flight in the last years, but over the first nine months of this year capital flight fell to $52.2bn, with $30bn of that going to pay off debt. That means Russia will probably see much less money leave than the $131bn the CBR was predicting would flee this year in January. The World Bank now expects capital outflow from Russia at $113bn in 2015, $82bn in 2016

The capital flight has been pushing down Russia’s total debt. While the sovereign debt is now in single digits versus GDP, Russia's total debt (including commercial debt) dropped below 30% of GDP in October, according to Nabiullina. “Despite the challenging period and financial sanctions environment, our debt declined 30% from January 2014 to date," she said on October 21.

Investment growth

But the most encouraging signal of all is an improvement in the fixed investment numbers. Investment has been falling for 20 straight months and it doesn’t matter what else the government does, without fresh investment Russia’s economy is doomed to stagnation.

Fixed investment delivered a pleasant surprise in September by expanding by 4.4% m/m even if it still fell 5.6% y/y. However, even September’s fall was a significant improvement over the falls in August (down 6.8%) and July (down 8.5%). “Investment has started growing in m/m terms even after adjusting for seasonal and calendar factors. We think this is linked to the decent results previously reported and greater macroeconomic stability,” Gavrilenkov said.

Sberbank was not alone in feeling a bit more optimistic after chewing over the October 20 data release. Uralsib’s chief economist, Olga Sterina, also ran through the numbers and concluded they were a lot rosier than the market had been expecting. However, Sterina highlighted that consumers are still very depressed, with retail trade contracting another 10.4% after a 9.1% fall in August and a 8.5% fall in July. Booming consumption is not going to be what lifts Russia out of this recession. “While one has to admit that the economic situation improved somewhat in September judging by the dynamics in investment, construction, industry and agriculture, but consumer demand is still very weak and unlikely to improve in the short term,” said Sterina in a note on October 21.

The debate amongst economists is just how bad the contraction is going to be this year - and while everyone agrees there will be a contraction, there is little consensus on how severe it will be.

Uralsib estimates Russia’s economy contracted 4.9% y/y in September versus 5.1% y/y in August. Russia’s Economy Ministry is more optimistic, estimating that GDP dropped just 3.8% y/y in September after falling 4.6% y/y in August. And clearly this year is going to be tougher than most were thinking in January following a raft of downgrades in the last weeks.