Page 6 - RUSRptOct18

1.0 Executive summary
If Russia’s economy was a sick person then it has spent the spring drinking a few bowls of soup made from the higher oil prices and is getting ready to get out of bed.
Russia is still not well. GDP growth in August in annual terms was a mere 1.0% - the lowest level since the beginning of the year, according to the Ministry of Economic Development – and the annual growth rate of the economy for January-August, the agency estimated growth at 1.6%.
The impending new sanctions from the US that could appear in November (Defending American Security Against Kremlin Aggression Act, or DASKAA ) are weighing heavily on the country. The Ministry of Economy has already downgraded its GDP forecast for this year twice from about 2% and the Central Bank of Russia (CBR) reversed four years of rate cuts in September but hiking rates the market’s surprise, as a direct result of the threat of new sanctions. There is a distinct air of battening down the hatches ahead of autumn’s bad weather.
However, business continues and at a microeconomic level the news is more encouraging. Industrial production numbers for the 2Q18 GDP growth were better than expected but still not sparkling. Industrial output growth in Russia in August slowed to 2.7% year-on-year from July's 3.9% y/y growth but growth momentum was maintained.
There was expansion in both mining and manufacturing which is where it counts most. But far more dynamic is financial intermediation which continues to lead the growth list, accelerating to 8.6% y/y from 5.9% in the first quarter. Corporate lending expanded somewhat, which has been lacklustre all year, but the retail lending is positively booming – so much that the CBR is due to tighten controls over loans to cool the growth in next months to prevent a bubble forming.
There was also a visible recovery in construction, which is one of the three big economic drivers: construction went from -5.1% y/y in the first quarter to +0.8% in the second. The recovery was most likely helped by non-residential construction, as the volume of residential buildings was sharply down by 10.3% y/y in the second quarter.
Most of the Russian activity figures for August were better than consensus expectations, but the improvements in manufacturing, consumption and construction are not enough to cause a rapid improvement in the economic outlook, leaving Russia muddling through as usual.
6 RUSSIA Country Report October 2018 www.intellinews.com