Russia's recession deepened in Q2, in line with the view and the consensus. Growth decelerated to -4.6% y/y from -2.2% in Q1, implying a q/q decline of -2.5% in Q2, almost double the -1.3% q/q decline in Q1 (although this could change since seasonally adjusted data have not yet been released). The Q2 drop offsets the milder-than-expected GDP decline in Q1 that had led a number of official and private sector forecasters to moderate their views in favor of a milder recession in 2015 and a better recovery in 2016. The July-August drop in oil prices and the lower Q2 growth have caused the CBR, Ministry of Economy, and Ministry of Finance to signal downward revisions to their forecasts.

"We retain our forecast of a -4% decline in 2015 and a -0.7% decline in 2016. While we predict an improvement in momentum in H2 15, with the decline in q/q growth moderating considerably, we still expect q/q growth to be negative in Q3 and possibly Q4. Then once q/q growth resumes in 2016, we expect it to be very gradual. With the low base at the beginning of 2016, this implies that y/y growth will remain negative in 2016, even with q/q growth positive", says Barclays.

Data suggest that the current recession will be shallower but more elongated than the recessions of 1998-99 and 2008-09 . The transmission of the recession is similar. A drop in oil prices causes RUB depreciation; this in turn lowers real incomes of households, leading to declines in consumption and investments. Monthly data suggest an improvement in momentum is underway. Consumption and investment declines appear to be pausing, there are no signs of recovery and no impetus for improvements, even though business profits have improved substantially.

The path of the recovery depends to a large extent on global oil prices. In the previous two recessions, oil prices fell sharply and then recovered quickly. Furthermore, with the sanctions in place, no speedy recovery of external financing is likely. In this recession, there has been a larger drop in consumption and a more modest decline in investment.

The fall in the RUB has been dramatic in past weeks: about 20% on a real effective basis and 30% versus the USD. This has largely reflected a combination of weakening terms of trade from lower oil prices and aggressive CBR rate cutting (despite the RUB weakness). However, the fall in the RUB has not been excessive relative to the move in its terms of trade.

"Unless oil prices rebound, we believe that a continued decline in the RUB lies ahead, with the central bank smoothing these movements by managing monetary conditions by decreasing RUB liquidity, delivering less rate cuts than priced (although market expectations have declined substantially in recent days, it is still looking for 62bp in three months) and/or offering USD in FX swaps", notes Barclays.