Page 7 - RusRPTJun21

economies around the world and lift all the boats simultaneously as soon as the first quarter of this year.
But Russia is not out of the woods yet as real incomes are still in decline and inflation is still a problem. From a slight improvement of 5.5% in April, in May the fast moving indicators ticked up again suggesting an increase to 5.8%, well above the Central Bank of Russia (CBR) target rate of 4% which is not going to be regained until next year, according to the experts.
The CBR has already abandoned its easing policy and begun to tighten with two rate hikes in March (25bp) and April (50bp) and is expected to tighten by another 50bp-75bp or the course of this year. With the cost of stables, especially food, soaring the population’s expectation for higher prices is at a multi-year highs of 14.5%. CBR governor Elvira Nabiullina is afraid that inflation expectations will become unanchored from reality and that will in itself be inflationary so she is acting decisively and aggressively now to manage those expectations.
At the macroeconomic level the picture is mixed. The basic sector data showed that the biggest sector declines in 1Q21 had come in industrial production (down 1.3% y/y), retail sales (down 1.6%) and "services to the population" (down 4.3%), while the biggest gains had come in agricultural output (up 0.4%), cargo turnover (up 0.4%), construction (up 0.2%) and wholesale sales (up 4.2%).
At the microeconomic level things are better with Russian corporate earning the best profits in five years and the bank sector also is earning profits on a par with the pre-crisis 2019 level. Economists estimate that Russia’s economy is already back to 98% of its 2019 level, which was the first year of strong growth following the 2014 oil price shock and devaluation crisis.
Rosstat data shows a faster-than-expected recovery in the two key segments of the Russian economy: the consumer sector and the resource industry that is being driven by a post-crisis commodities boom. In addition to the recovery in oil prices those for things like iron are at a nine-year high and copper prices topped $10,000 per tonne to reach a new all time high, which is only adding to both revenues and positive sentiment. A cold spring has also seen gas prices in Europe double to over $200 per thousand cubic meters that will boost Gazprom’s bottom line and ensure a 50% of profit dividend payout that also lifted Russia’s stocks, up 12% YTD, at the time of writing.
Budget execution is also good with stronger than expected revenue flows not only from oil, which has benefited from prices consistently over $60 a barrel – well above the $42 breakeven price for the budget – but also from non-oil tax collection. March tax collection as up by a third (33%), largely on the low base effect which will confuse all the reporting this year, but revenues will easy cover the extra social spending Russian President Vladimir Putin announced in his state of the nation speech and analysts say the government could increase spending by even more than promised to give the economy a boost.
Overall, Putin’s package of measures announced will cost the Russian government RUB400bn ($5.2bn) over the next two years, Russia’s Finance Minister Anton Siluanov said after the speech — equivalent to 0.2% of
7 RUSSIA Country Report June 2021 www.intellinews.com