Russia Country Report Sep21 - September, 2021

September 2, 2021

Russia’s economy expanded by 4.7% in June as the economy continues to stabilise. The Russian economy continued to normalize on a y/y basis, although many sectors have begun to see stagnation, the housing market being an exception.

The GDP growth rate slowed to 4.7% y/y in July vs. 10.3% y/y in 2Q21, according to the Ministry of Economic Development. The prints from many sectors were worse than consensus expectations on the production side, while incomes and unemployment both improved thanks to higher profits that translated to better paychecks.

Analysts expect the momentum to fade in 2H21 as consumption stabilizes following the spending of excess savings, as well as due to lower loan growth, although social disbursements could delay this process for a month or so. With the worse-than-excepted prints, analysts see a risk that FY21 growth forecast of 4.8% y/y drops to 4.5% y/y.

Russia's economy recovered from last year's recession, but the pace of recovery of the sectors differed considerably

The economy has recovered from the pitfall of spring 2020 and the recovery has continued gradually in recent months. In the first quarter of this year, GDP was already slightly higher than two years earlier (i.e. in the first quarter of 2019) and in the second quarter, growth from two years ago was estimated by the Ministry of Economy at about 1.5%.

The economic recovery has varied across the main sectors. Production in the extractive industries has recovered significantly, to just under 2% less in the second quarter than two years earlier. Under OPEC +, crude oil production has gradually climbed back to pre-recession levels last year, down 6% from two years ago in the second quarter. Natural gas production was a few% higher than two years earlier. In the various services supporting oil and gas production, which form a slightly larger sector of the extractive industry than natural gas production, growth was more than 20% from two years ago.

Production in the processing industry has recovered quite well, being about 5.5% higher in the second quarter than two years ago (7% in the first quarter). Growth has been very broad-based. Among the six major processing industries, growth from two years ago was 7-8% in the food industry, more than 13% in the chemical industry, more than 30% in the metal products industry and 7% in the machinery and equipment sectors. Of all the processing industries, only metal processing was lower in the second quarter than two years earlier. On the other hand, however, growth in the processing industry has leveled off this year, and seasonally adjusted output has declined over the past couple of months. The seasonally adjusted Purchasing Managers ’Index (PMI) for the manufacturing industry fell markedly in July after a good couple of months. According to the survey, the background is a decrease in production and new orders. Also in Rosstat's business survey, the production and order outlook for the processing industry remained rather bleak in July.

Retail sales in the second quarter were 5% higher than two years ago and now less than 5% lower than in the second quarter of 2014, when retail was at its highest levels in 2010. However, seasonally adjusted sales have increased rather slowly in recent months. Services provided to households (excluding government services) continued to recover in the second quarter and were now relatively slightly lower than two years ago. Consumers' expectations of the state of their own finances over the next year have been reasonable in Rosstat's quarterly survey this year and quite good in the Russian Central Bank's monthly survey. However, according to a central bank survey, expectations fell sharply in July.

The recovery in consumption has not come so much from real household disposable income, which in the second quarter was still less than one% lower than two years earlier. Consumption this year has been strengthened by the fact that net household savings have been very low compared to last year's recession as well as in 2019. Including net savings, net household borrowing from banks has increased in recent months. The number of employed returned to almost two years ago in the second quarter.

Wholesale trade has recovered at the pace of 10% more in the second quarter than two years earlier. Construction has clearly increased over the past two years. The volume of freight transport (including pipeline transport of oil, petroleum products and natural gas) grew slightly higher than two years ago.

Inflation remains the biggest problem and was running at 6.5% in June despite a string of rate hikes by the CBR: March (25bp), April (50bp), June (50bp) and July (100bp).

The inflationary pressures are going to remain after Russian President Vladimir Putin announced several one off payments to pensioners and military personal in the lead up to September’s general election.

Analysts are expecting another rate hike of at least 25bp in September as a result of Putin’s largess, and 50bp is more likely, given CBR governor Elvira Nabiullina’s ultra conservative approach. She worries that inflation expectations of the population have become unanchored and are running at twice the rate of actual inflation – which is itself inflationary.

The reason for this mismatch is the continuing soaring prices for food which remain in double digits and are extremely high in some categories like sugar where prices have risen by three quarters in the last year. As the share of food in the average shopping basket has risen from a low of 35% to around 50% now these prices are very visible and a recent survey found that a third of Russians are struggling to make ends meet so hikes in food prices are very painful. bne IntelliNews tackled the same issue in an article that looked at the borscht index which calculates the changes in the price of the ingredients to make a portion of borscht and then works out how many portions a family of four can afford each month: it has fallen to only 48 portions a month, and that is if you don't use meat in the dish.

However, real incomes are starting to rise again slowly as the economy recovers and Russia is on course for a bumper harvest that should ease these pressures going forward

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