The monthly activity data released this week confirm that Russia’s economy remains in a decent shape, helped by the recent rise in the oil price, according to Capital Economics.

GDP growth is on course by around 4.0 to 4.5 percent y/y in Q1. With the economy doing well and inflation at record lows, the central bank is likely to leave interest rates on hold at its next policy-setting meeting in early April says Capital Economics.

February's activity data were strong across the board. The most impressive piece of news was the sharp pick-up in industrial production growth to 6.5 percent y/y adds Capital Economics.

Consumer facing sectors remain in good shape, points out Capital Economics. Retail sales grew by a healthy 7.7 percent y/y in February, up from 6.8 percent y/y in January. Household consumption continues to grow by an impressive 7.0 percent y/y in Q1 and appears to be on course at these rates.

As things stand, policymakers are highly unlikely to change interest rates, notes Capital Economics.

While the economy appears to have made a solid start to the year, it’s worth bearing in mind that this month’s activity data were enhanced due to the greater number of working days in February as compared to 2011, adds Capital Economics.

The apparently strong performance of the Russian economy is built on shaky foundations. Without radical reform, growth is unlikely to exceed 2 to 3 percent in the coming years, well below the growth of almost 7 percent before the crisis.

Capital Economics has forecast that if oil prices fall, over the next 6 to 9 months or so, the strain in Russia’s growth model will come to the fore. This could result in the Russian economy slowing down in the second half of the year, with growth averaging 3.0 percent over 2012 on the whole.

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