Russia’s economy remains in recession and will likely contract by
between (official estimate) 0.6% and (bne consensus) 0.8% in 2016 before
returning to mild growth in 2017. While there is still no consensus on just how
much growth there will be in 2017 no one is talking about anything more than
about 1.5% with the bne consensus at 1%. The long-term growth potential --
assuming no drastic structural reforms which are unlikely until after the 2018
presidential election -- is capped at 2.4%.
Having said that the economy is clearly starting to recover . Inflation fell
below 6% for the first time ever in modern history in recent months.
Unemployment is also at record lows under 6%. Industrial production remains
underwater, but only just, while some sectors -- notably manufacturing and
agriculture -- are now growing. Even more encouraging was a strong
improvement in the PMI manufacturing index.
Russia became a world leader in grain exports this year on the back of a
bumper harvest and grain has overtaken arms in exports in dollar terms. And
with labour cost now lower than China’s the talk of non-oil exports with products
like Russian-made cars may appear in 2017. On the flip side there is still little
progress with significant import substitution in any sector other than food
processing, but this takes time to build up. Presidential economics advisor Alexi
Kudrin suggested that Russia could return to 4% GDP growth if non-oil export
volumes doubled every year - which remains an extremely ambitious target and
has not been formally adopted as a governmental goal.
Politically Russia remains tense. Rosneft CEO Igor Sechin is now
operating with little restriction in his sector . He has successfully captured
Bashneft and is poised for his company to buy a 19.5% stake in itself using
money lent by Rosneft’s parent company Rosneftegaz in a totally pointless deal
that brings no fresh money to the budget. Minister of Economics Alexei
Ulyukayev publically opposed the deal and was subsequently arrested for
receiving a bag of $2mn cash in it -- a bag given to him by Sechin personally,
according to bne sources.
However, socially things are calmer. Putin’s popularity is currently at an all
time high of 84%. The polls also show the population think the worst is passed.
While retail borrowing has only made a modest return to growth and no one is
planning big ticket purchases, the bne Watcom index shows retail traffic has
recovered to 2014 levels and mild consumption will support growth next year.
The bank sector is now back in profit, but state owned Sberbank still
makes up some 70% of the sector’s profits, although its share is starting to fall
again. Mortgage lending is booming with volumes expanding by a third y/y in the
third quarter, but corporate lending remains very depressed so the sector cannot
be called “healthy.”
The securities markets are also doing well. The bond market continues to
see growing number of issues with spreads down by about 100bp since the
start of the year. The equity market has also come back to life with the RTS up
about a quarter YTD and the MICEX index up about 13%.
At a microlevel the big companies are back in profit and taking
advantage of the recession to consolidate their market share through
acquisition and organ expansion with many of the leading chains foreign and
domestic rolling out ambitious new store plans that double their network in some
cases. Retail sales remain negative overall, with a 4.4% contraction in October,
and real disposable incomes also contracting, even if real and nominal incomes
Russia continues to run a double trade and current account surplus, but
these are down by about a third on 2015 thanks to the low prices of oil. At the
end of December OPEC announced a production cut that will support prices, but
as Russia’s budget breaks even at $70 oil and prices are unlikely to rise much
above $50 there is still a hole to fill.
At the macroeconomic level containing the budget deficit at around 3%
this year is main challenge the government is facing -- and failing to solve. The
deficit is likely to end this year at about 3.7%, barring a last minute privatisation.
The official plan is to reduce the deficit by 1% each year thereafter to 2019, but
this goal is entirely dependent on the government sticking to its large scale
privatisation plans. Currently between Sechin’s shenanigans at Rosneft and the
political problems Russia faces with the west finding investors to unload many
billions of dollars worth of shares in huge companies looks like a pipedream.
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