Page 6 - RUSRptSept18

1.0 Executive summary
Just the threat of new “crushing” US sanctions that may be adopted in the autumn is already hurting the Russian economy in August . The Ministry of Economic development has already revised the 2018 full-year GDP growth to 1.9%, while the CBR expects GDP growth in the range of 1.5-2% for the full year.
Inflation has already ticked up to over 3%, partly due to the hike in VAT from 18% to 20% in July, which means the Central Bank of Russia (CBR) is almost certain to halt its easing cycle – and may even tighten slightly at one of the two policy meetings left this year – and the government is generally putting the economy on an “economic war” footing. The most obvious place this is to be seen is the Ministry of Finance decision to sell off three quarters of its US T bill holdings (a move mirrored by Turkey, which also got hit by Trump metal sanctions in August.)
At the end of August president Vladimir Putin also finally dealt with the huge disapproval to the government’s proposed pension reform launched in the midst of the World Cup. He reduced the proposed retirement age for women (which accounted for 61% of his votes in the presidential election in March): the original idea was to hike the female retirement age from 55 to 65 but Putin has cut it back to 63, and taken a few more years off for mums with more than three kids.
Putin’s popularity fell from over 80% into the 40s with this reform, but with the number of workers supporting each pensioner down from 2:1 to close to 1:1 there was no way of avoiding this reform. It remains to be seen how far the “good tsar” popularity recovers, but he clearly decided to spend some of political capital on this change and was correct to do it immediately after the presidential election to give the population the longest possible time to forget about the change before the next elections in 2024.
With GDP rising by 1.5% last year and up 1.8% in the second quarter, the Russian economy started to pull out of recession, albeit at a slower pace than many hoped.
The politics of sanctions are weighing on the recovery and life has been made more difficult by the fall of the ruble recently which has lost 17% YTD as of the end of August.
However, many of the other economic indicators are doing well . gross international reserves (GIR) have continued to rise and are just shy of $460bn, with the National Welfare Fund (NWF) adding nearly $10bn in two months to hit $77bn – the backstop against more budget problems in the future.
Industrial production also surprised on the upside increasing by 3.9% in July, lead by an uptick in manufacturing. The most rapidly growing sector of the Russian economy, and the one demonstrating the highest demand for credit, is transport and communications . During the first half of 2018, credit to the sector increased 20.8%, although the CBR does note that the substitution of ruble-denominated debt for foreign currency loans contributed noticeably to the high growth.
The budget is also now in surplus thanks to oil that has been averaging over $75 per barrel for the last three months, which is feeding both budget spending and the NWF.
Oil, but not only, has had a knock on effect to Russia’s balance of payments were the government is now running a healthy current account
6 RUSSIA Country Report September 2018 www.intellinews.com