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surplus of $28bn for the second quarter. It was only a year ago that Russia Inc ran a (small $300mn) current account surplus, but rising oil prices have come to the rescue. The oil price rose sharply in the second half of 2017 and the expected oil price this year will be substantially higher than assumed last autumn. The average oil price this year is $64–65 a barrel, 18% higher than last year.
Less encouragingly inflation broke above 3% for the first time in a year
as the ruble devaluation and higher costs of petrol feed through. While CPI remains at historical lows, producer price index of inflation (PPI) jumped in the last two months to 16% on the back of those increasing fuel costs.
However, while the macro picture is mixed it remains broadly positive and although the US sanctions are causing problems, it is nothing the government can’t cope with.
On the policy front all efforts are being thrown into finding money to pay for Putin’s RUB8 trillion of new spending over the next six years on the social sector and infrastructure that are part of his May Decrees . While the MinFin continues to hone the tax service, this month there was a flap after presidential advisor Andrey Belousov suggested a super-tax of RUB500bn on the top 14 commodity producers, sparking a month of controversy. However, as August came to a close the oligarchs had agreed a deal whereby they will invest into specific projects rather than give money to the government – so perhaps Belousov’s proposal was just an opening gambit in a bid to force the oligarchs to increase their investments as part of the Kremlin’s general policy of raising gross capital formation to 25% of GDP, up from 21% in 2017.
The Kremlin is correct to identify the need for investment as the key issue facing the Russian economy – and was also right to identify the corporate’s reluctance to invest. However, it remains unclear how the government will be able to raise the approximately RUB2 trillion a year of extra spending Putin called for. All-in-all Putin’s target are probably designed to goad the government into action rather than being actual targets so if investments fall short no one will be too disappointed, as long as there was significant progress.
Fixed investment recovered last year, largely driven by investment in oil & gas production and pipeline transmission capacity by state-owned companies, but total fixed investment in 2017 only matched the levels of 2011 and 2008. Fixed investment is expected to increase this year on the back of more state lead investments, lead by the programme to spend heavily on infrastructure projects. Rapid growth is not expected as the major investment phases of various large projects are already past and appetite for new investment is still limited by high real interest rates.
In the banking sector the CBR continues its clean up and the number of banks fell to 518 in August, down from just under 1,000 when CBR governor Elvira Nabiullina took over in 2013. She has been closing banks at the rate of a 100 per year regular as clockwork. Russia is on course to hit Putin’s de facto goal of about 300 banks in the next two years and in the meantime the CBR continues to improve the regulations and support. The sector is back in profit, although the vast majority of profits go to Sberbank. The CBR also launched its first effort to sell of one of the banks it took over during the mini-crisis last September.
Retail lending is booming , while corporate lending finally started to pick up. While household consumption began to recover last year, it was still at the 2012 level. Consumption was supported by a significant slowdown in inflation, higher wages and social payments to households, as well as increased borrowing and lower savings rates. However, other household income streams diminished, and real household incomes started to improve only during the first
7 RUSSIA Country Report September 2018 www.intellinews.com