Russia Country Report Apr21 - April, 2021

April 1, 2021


The Russian economic recession has ended, according to the Higher School of Economics (HSE). Russia had one of the mildest contractions of any major economy in the world, however the recovery will be slower than most other countries and GDP growth will run behind that of the global average.

"The growth of main macroeconomic indicators during two consecutive quarters at the end of 2020 technically makes it safe to say that the recession in Russia ended as early as by the beginning of 2021," according to the bulletin dubbed ‘Commentary on state and business’ provided by HSE.

Growth of GDP and investments was reported in Q3 and Q4 2020, the research said. During that period GDP growth amounted to 4.2% and 1.7% quarter-on-quarter, whereas fixed investment grew by 1.2% and 0.4%, respectively, experts said.

The macro-indicators are also returning to normal and posting healthy surpluses. Russia still has a twin trade and current account surplus, both of which will increase this year on the back of rising commodity and oil prices. And Sberbank estimates that the federal budget will return to surplus of about 0.5% this year after posting its first deficit in years in 2020.

Sberbank’s commodity strategy team has upgraded its 2021 oil price forecast to $68/bbl Brent (from $55/bbl). Although a higher oil price clearly has implications for the economy, because of the fiscal rule and currently high geopolitical premium, the bank still expects the ruble against the dollar to average 73 this year. Overall, Sber conclude Russia's finances appear to be in solid shape.

But one soft spot is the ruble exchange rate is being driven almost entirely by geopolitics at the moment. Analysts estimate the fair rate at closer to 68 to the dollar, but most have a discount due to geopolitical tensions and expect the ruble to end the year at about 72-73 to the dollar.

The extra windfall cash will help stimulate economic growth, although the government will remain cautious and probably use part of the extra money to reduce its borrowing plans, rather than spend the whole excess income on stimulus programmes. In addition to the rising revenues the government also still has some RUB1 trillion left over in unspent funds from 2020 to add to the RUB21 trillion spending in the budget.

While the government is still talking about austerity to preserve its cash in the face of a sanctions war with the US, the state has already said it will also up spending from the National Welfare Fund (NWF).

The liquid part of the NWF is already at 7.3% of GDP and is set to grow further. The government is very likely to start investing the sum above 7% of GDP, as per the rules, on infrastructure projects. Sber now expects GDP to increase by 3% in 2021 as a result, which is still a very modest rate all things considered.

Investment will also continue to recover. Its growth can be quite subdued, as there will soon be no strong need for investment, with capacity utilization at its lowest point in a decade since last spring.

The main economic problem is soaring inflation that has been driven up by rising food prices. Inflation hit 5.7% in February, due to food and the feed through from last year’s devaluation effects, but many analysts anticipate that February was the peak for inflation this year, which is now well ahead of the Central Bank of Russia (CBR) new target rate of 4.25% and will fall from March.

The CBR surprised the market with a 25bp pre-emptive rate hike taking the prime rate to 4.5%, its first hike since 2018 and ending a long easing streak that began after the emerging hike to 17% in the 2014 oil shock crisis.

Where analysts had been expecting a mild increase of 50bp over 2021 those estimates have been increased to as much as 125bp over the rest of this year, depend on a number of factors that are in play including inflation and geopolitics.

The government remains confident that inflation peaked in February but the CBR is taking a very cautionary approach: CBR governor Elvira Nabiullina wore a “hawk” brooch to the March CBR rate hike press conference.

On the consumption side things are no going as well but the outlook for this year is brighter. Russia’s real disposable incomes have fallen to an eight year low as a result of the coronacrisis, falling 3.5% in 2020, according to Rosstat, but the outlook for 2021 is brighter.

Real disposable incomes are down by more than 10% from the 2013 level, the last year of solid growth before Russia’s annexation of Crimea and a slump in world oil prices pushed the economy into recession, the Moscow Times reports.

Economists said the government’s limited — but well-targeted — anti-coronavirus financial support helped soften the blow for the poorest families, although an extra 400,000 households fell below the poverty line last year, the RBC news website reported. The number of Russians now classified as living in poverty stands at 19.6mn.

But the recovery in private consumption will continue, and consumption will return to the level of 2019 and 2014 by 2023. Employment and household incomes are recovering. As in the last couple of years, general government wage increases are projected to remain in line with inflation, while pensions will rise by about 2% faster than expected, in line with the previous decision. The unwinding of household funds accumulated in the recession and the opening up of foreign tourism will add to the turnaround in consumption, according to Bank of Finland Institute for Economies in Transition (BOFIT).

The falling standard of living has been fuelling rising social tension, however, with Russian incomes still by far the highest in the Commonwealth of Independent States (CIS) and on a par with the lower end of EU members, the situation is still not explosive.

With the military modernisation largely complete the Kremlin has turned its attention to restoring the prosperity and in 2018 launched its 12 national projects that are designed to fix the problems with the economy and so should quell the social discontent. Originally the national projects programme was supposed to be completed by 2024 in time for the next presidential elections, but as a result of the crises in 2020 the deadline has been pushed back to 2030.

Other economic data published March 25 also showed the economy continues to beat expectations, registering smaller declines in output than analysts had predicted. The official unemployment rate fell below 6%, although economists say that is probably more connected with the government reducing unemployment benefits than a surge in job creation, and the true rate of joblessness is likely significantly higher, reports the Moscow Times.

Construction and agriculture were the only sectors of the economy to register growth in 2020, Rosstat said as cited by the Moscow Times. Industrial production fell by 2.9% in 2020. Retail sales slumped by 4.1% due to the nationwide lockdown last spring. Unsurprisingly, the consumption of paid services fell the sharpest, registering a 17.3% drop over the year.

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