VOX: Russian investment growth of 4.4% y/y in 2017 was unbalanced

VOX: Russian investment growth of 4.4% y/y in 2017 was unbalanced
Rosstat upgraded full-year investment growth from the initial estimate of 3.6% to 4.4%.
By Ben Aris in Berlin March 7, 2018

Vladimir Tikhomirov chief economist at BCS GMRussian investment grew for the first time in five years in 2017, according to Rosstat, which reported an increase of 4.4% y/y on March 5.

While Rosstat upgraded full-year investment growth from the initial estimate of 3.6% y/y, it also revised down the first to third quarter figures from initial estimates of 4.2% y/y growth in 9M17 to just 3.0% y/y, compensated by strong results for 4Q17 of 6.4% y/y growth.

“A rise in fixed investment after four straight years of decline was a welcomed development,” said BSC Global Markets chief economist Vladimir Tikhomirov in a note. “Going forward, we expect investment to be a key growth driver for the economy, something that should be supported by the Kremlin’s announced plans to significantly boost infrastructure and housing construction.”

The 2017 result was the first annual growth in five years. The quarterly results for investment pointed to a major acceleration towards the end of 2017, says Tikhomirov: in the fourth quarter of 2017 investment rose by 6.4% y/y after growing by 2.2% in the third quarter and 5% in the second quarter.

In the structure of investment, the main contributors by economic sector in 2017 included the resource industry (with a 25% share of total volumes of investment), transport (18% overall, pipeline construction alone accounted for 10.2%) and the manufacturing industry (16%). The private sector accounted for 48% of all fixed investment, while 21% came from the state (federal and municipal), 11% from joint ventures and 8% from foreign companies. The bulk of investment was funded by the companies’ own funds (52%), the budget (16%) and bank credits (11%).

However, despite the good news, not all economists were happy. Russia's two-year long recession has ended but the recovery remains very fragile. One of the problems is most of the money being spent remains state money. 

“We believe that the positive shifts in the area of investment last year were primarily driven by increased state spending (including on defence and the construction of national projects, such as the Crimea bridge and FIFA stadiums) as well as by the creation of new pipeline routes for Russia's oil and gas exports. However, given the Kremlin's push for larger infrastructure spending and falling loan rates for corporates and mortgages, we expect to see continued growth in investment this year and in following years. On our estimates, the volume of fixed investment in Russia could grow by 6.3% y/y in 2018 and by 7.8% in 2019,” says Tikhomirov.

Another problem is this investment is very unevenly distributed. 

Natalia Orlova, chief economist at Alfa Bank“Although the 2017 results are now stronger than the initial estimates, the structure of investment growth raises concerns. Firstly, investment growth is highly concentrated in just two sectors – commodity extraction and transportation, which produced around 80% of the investment growth, while the others disappointed,” Natalia Orlova, chief economist at Alfa Bank said in a note.

Investment growth in the commodity extraction sector was 8.6% y/y and 8.8% y/y in 2017 in the transport sector. However, investments in agriculture increased by just 1.3% y/y, while manufacturing posted a contraction of 0.8% y/y, reports Alfa Bank. 

"Secondly, investment growth in the observable sectors, which account for around 75% of all investments, accelerated to 4.2% y/y in 2017 after a modest 1.6% y/y growth in 9M17," adds Orlova. 

“That means that the strong growth in the unobservable sectors, which we previously attributed to a change in legislation for on-line cash registers, was recounted by Rosstat to the observable sectors, thus reducing the representativeness of the quarterly statistics,” Orlova said.