Page 6 - RusRPTNov18

1.0 Executive summary
Russia continued its lackadaisical economic recovery in the third quarter. Things are getting better but not fast enough and industry and consumers spending is not getting a change to build up any momentum.
Part of the reason is macro-constraints such as the persistently high cost of borrowing . Another is the mistrust owners and punters have in the government because of the lack of clarity over where the country is headed. However, more immediate is the government tendency to err on the side of caution: the liberals in charge of macro and fiscal policy are more concerned with preventing, or at least dealing with, another crisis than they are with boosting growth. This is manifest in the Ministry of Finance reluctance to lift the cut off for oil prices in the so-called budget rule from $40 to $45, as former Finance Minister and co-head of the presidential council Alexei Kudrin has suggested, to ensure there are adequate reserves to deal with shocks, rather than take a risk and spend more to stimulate growth.
As long as these policies persist, and while there is still no progress in making deep structural reforms, Russia’s growth remains range bound at about 2% for the foreseeable future.
Russian GDP grew by 1.9% y/y in the second quarter of this year, with seasonally-adjusted GDP rising 0.9% from the previous quarter. In the second quarter, private and public consumption, as well as fixed investment, grew by only 0.2% q/q. Russia needs to see investment growing by 25% a year but the annualised figure is currently closer to 9%.
Seasonally-adjusted growth in fixed investment has been positive since the start of 2016 , albeit quite low. Investment is still nearly 10% below its level at the start of 2013, when it began to fall – well ahead of the fall in oil prices.
The soggy nature of growth is also visible in the industrial production numbers which began to slow in September. Industrial production was down to 2.1% year-on-year from 2.7% seen in August and 3.9% in July, the latest data by Rosstat statistics agency release in October shows. A similar trend is seen in the PMI manufacturing index which is currently just below the 50 no-change level, although the composite index shows expansion, held up by robust growth in the services sector.
What growth there is in the real economy is largely driven by mineral extraction where Russian oil companies in particular are earning record profits on the back of higher than expected prices and costs deflated by the ruble devaluation.
One bright spot is the cuts to budget spending and a unexpected fall in imports means that the Russia federal budget is current in surplus of around 3% of GDP (although many budget payments are back loaded to the end of the year) and the current account is on course for a record surplus of $113bn this year.
Oil prices may not be as high as in the mid-noughties, but Ministry of Finance has cut the breakeven price of a barrel of oil to $53 making Russia INC more profitable than it ever was in the boom years.
6 RUSSIA Country Report November 2018 www.intellinews.com