Page 56 - RUSRptAug18

Other negative rating risks are "material deterioration in Russia's budgetary trajectory, either due to spending pressures or the crystallisation of contingent liabilities in the banking sector or state-owned enterprises (SOEs)."
As before, Russia’s growth is constrained by structural weaknesses, with the economy dependent on revenues from oil and gas exports, as well as by wider institutional and governance bottlenecks. While Russia's oil and gas sectors only make up around 8% of GDP, they still account for some 45% of total exports, S&P reminds.
Other rating constraints include geopolitical tensions and their resulting international sanctions that could drag on Russia's long-term economic growth prospects. These constraints are likely to keep the growth below that of its peers.
Negative demographic trends and low productivity continue to weigh on Russia's long-term growth potential, with structural impediments to productivity-driven growth including the state's dominant and increasing role in the economy, the challenging business and regulatory environment, and relatively low levels of competition and innovation, S&P writes.
S&P projects that Russia's real GDP growth will likely increase to 1.6% in 2018, followed by a modest 1.8% on average over 2019-2021. It is unclear whether the agency has factored in the effects of the recent VAT hike which was admitted even by the government to be going to slow down the growth, notably in 2019.
Growth is seen supported by "an ongoing global economic upswing and a moderate recovery of domestic demand helped by improving bank lending and the government's proposed boost to public investments."
As for the post-election reform and spending drive announced by President Vladimir Putin in his May Decree, S&P remains "guarded about the prospects of a substantial strengthening of Russia's investment climate, including improvements in the judicial system and law enforcement, given our view of a limited effectiveness of past reform initiatives."
Still, the agency does not expect the needed 1.5% of GDP spending needed to implement the May Decree to carry any risks to compromise fiscal stability, and sees the funding mix comprised of the VAT hike, pension reform, oil and gas tax reform, and more borrowing for infrastructure spending fund as "credible".
The agency also does not expect "any notable reduction in the government's role in the economy," which is in sync with the government's budget draft that foresees little or no privatisation revenues.
In addition, the uncertainty surrounding the succession of power from Putin in the next elections of 2024 could undermine the predictability of policy priorities, S&P warns.
In the banking sector, the Central Bank of Russia’s (CBR’s) efforts to maintain stability "have been largely effective," with the lending growth picking up since the second half of 2017, supported by strong growth in retail lending and mortgages in particular, along with some recovery of lending demand from corporate borrowers.
"This, together with the restructuring efforts by banks in the previous three years, should also support the gradual enhancement of the sector's asset quality," S&P notes. The agency expects that new business growth will enable a moderate improvement of lending margins and profitability of the Russian banking system.
56 RUSSIA Country Report August 2018 www.intellinews.com