Russia Country Report Mar18 - March, 2018

March 5, 2018

Preliminary figures from Rosstat show that Russia’s economy turned the corner in 2017 and GDP grew by 1.5%, slightly less than nearly all forecasters had expected. Recovery was relatively slow given that the oil price rose by over 25% from 2016. And growth was slowing again as the year ended: GDP growth fell below 1.5% in the fourth quarter.

While the official forecast for growth for 2018 is 1.8% and that is likely an underestimate: more economists are marking up growth predictions higher. Capital Economics predicts 2.5% growth and Goldman Sachs is even guessing 3.3%.

Consumption is likely to return as an economic driver in 2018, although the size of the effect is as yet unknown. Real disposable incomes are muted but set to rise as the year wears on.

The rise in GDP was partly stymied by imports, which soared 17%. The growth of imports relative to GDP growth was exceptionally fast. The rise in imports reflected the extremely low level of imports in 2016, a 25% rise in Russian export earnings and real ruble appreciation of 16% from 2016. Import growth cooled a bit in the fourth quarter, but was still 15% y/y.

Most of the economy's demand categories rose in a good tempo last year. Growth in the volume of Russia's exports accelerated, reaching 5.4%. Domestic demand increased by over 3.5%. That was the pace of growth also in private consumption, which was reflected in rising domestic retail sales and sales of services as well as the spending of Russians when travelling abroad. Public consumption further declined slightly.

Russia's fiscal sector strengthened in 2017. Consolidated budget revenues (federal, regional and municipal, plus social funds) increased by over 13% y/y. The revenue bump helped reduce the consolidated budget deficit to around 1.5% of GDP.

Higher oil prices helped increase revenues via oil & gas tax income (up 23%) whose share rose to close to a fifth of total budget revenues.

Other budget revenues rose by over 10%, which is rapid even if the data was adjusted for inflation. Revenues from corporate profit taxes and goods excise taxes rose especially fast. Value-added tax revenues provided 17% of total budget revenues and were up by well over 10%, reflecting both economic recovery and improved tax collection. Mandatory social taxes on worker wages, which represent 22–23% of budget revenues, still showed notably strong growth.

Growth in consolidated budget spending accelerated last year to over 6% (here 2016 spending does not include the large sum granted to defence industry to pay off their bank loans). The growth in social security spending rose to over 10% and the share increased to over 36% of total budget spending. Spending on various sectors of the economy increased by over 10% as spending on transport rose fast. Spending on space activity appears to have tripled and the sub-category of other spending on the economy grew quickly (these two lack further itemisations). After a long decline, spending on the housing sector jumped, mainly on big spending on housing by the City of Moscow, while the defence spending category declined.

Fixed investments rose over 3.5%. The Central Bank of Russia estimates that most of the growth in investments came from one-off government investments and construction of the Power of Siberia natural gas pipeline. Growth in inventories made an unusually large contribution to growth in domestic demand. The figures for GDP components in 2017 may see even substantial revisions later on as suggested by the large entry for "statistical discrepancy" in the preliminary figures.

GDP last year returned to its 2013 level. Consumption and fixed investments were still below the levels where they were half a decade ago, however. Imports were about 10% below their 2011 level.

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