Russia Country Report Jan21 - January, 2021

January 11, 2021

After a rapid recovery in the summer, the Russian economy weakened again in the last months of 2020 and the mild recovery in various industries was mixed.

The summer saw a rapid bounce back as lockdown restrictions were eased and retail sales recovered to almost the same level as a year earlier by September. However, as the cold weather arrived and a second wave of the pandemic gathered momentum the economy slowed again to limp through to the end of the year.

According to audited data, Russia's GDP contracted by 3.4% year-on-year in the third quarter. Having said that the full year performance was a lot better than anyone was predicting in March with the GDP contraction estimated to be 3.9% for the full year, which includes a 8% plunge in the second quarter.

Most of the macroeconomic numbers came in better than expected with disappointments on inflation which rose to 4.8% by the end of the year and unemployment to over 6% from the post-Soviet lows recorded in 2019.

Inflation was rising so fast in the last months of the year that Russian President Vladimir Putin was on telly several times to complain about the price of pasta. Food prices rose particularly sharply in November with sugar prices up over 70% y/y. The most rapid rise in prices in November was last in 2014, when the sharp depreciation of the ruble accelerated import inflation. In November, food prices were almost 6% higher than a year ago.

The government opened talks with retailers to impose a temporary limit to price rises. This is not the first time the government has leant on food producers to limit price rises in a crisis and these deals are voluntary and usually last about six months.

These results were doubly impressive given the low level of government stimulus spending, which came in at between 3%-4%, one of the lowest levels in the world.

The robustness of the economy is partly a function of the underdeveloped nature of the Russian economy where services remain underdeveloped. Services have been one of the worst affected sectors and in Russia too the services PMI was at 48 in December, two points below the no-change 50 mark, while manufacturing was just below 50. In previous years service growth, fuelled by the booming e-commerce, has been the engine of growth for the Russian economy, but that reversed in 2020.

Industrial production (IP) rebounded surprisingly in November to 2.6% y/y vs. 5.5% y/y in October and 3.6% y/y in September. Industry-wise, the most significant improvement occurred in manufacturing (+1.1% y/y vs. -3.7% y/y in October). Mining and quarrying improved (-6.8% y/y vs. -8.6% y/y in October) thanks to the better performance of the non-energy sector (coal, metal ores and other minerals).

A special feature of this year is the OPEC + agreement between Russia and other oil-producing countries, which limits crude oil production so that the world market price of its oil does not fall too much. As a result, mining operations in Russia have contracted very sharply, with an annual change of −12% in the third quarter.

In October, the situation deteriorated, especially in the processing industry and agriculture, while retail sales picked up. According to the forecast of the Russian Ministry of Economy, GDP contracted by 4.7% in October and by 3.6% year-on-year in January-October.

Retail sales picked up slightly in October after a couple of weaker months. New car sales were up 7% higher than a year earlier, but total sales were still 2% lower than a year ago.

However, the pick-up in trade is likely to remain temporary, as it is estimated to reflect precautionary demand due to the weakening of the ruble and the darkening of the corona situation, as in the spring. The recovery of other services froze in October and failed to recover in the following months.

Agriculture also weighed on economic development putting in its first contraction two years in October when it was 7% lower than a year earlier.

The contraction was largely due to lower yields of sunflower and sugar beet compared to last year’s record readings.


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