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bne February 2020
The ruble rallied during the first half of December, gaining 2.3% against the dollar. That marked an 11% year-on-year rise against the US currency and a 14% increase against the euro. Russia has lately seen capital inflows, partly because government bond yields remain high, despite successive rate cuts.
From 7.75% at the start of 2019, Russia ends the year with
a base rate of 6.25%, after the Central Bank of Russia lowered rates five times over twelve months. This reflects steadily falling inflation – which ends the year at 3.2%, well below the CBR’s 4% target. Inflation has eased due to a stronger ruble and lower food prices, the result of higher agricultural output. But it also stems from much lower producer price inflation, which, towards the end of 2019, tipped into deflationary territory.
Producer prices fell year-on-year in both October and November, in the latter month by no less than 4.9%, with suppliers slashing prices in the face of falling demand. As
a result, Russia’s PMI manufacturing index plunged to 45.5 in November, its lowest since mid-2009. In turn, the closely- watched Rosstat Business Confidence Index also dropped further, hitting minus 5 in November, down from minus 3 the month before.
Russian consumers remain cautious in the face of what they see as an uncertain future, with 68% of adults favouring saving over spending, according to a recent authoritative poll. This compounds the difficulties faced by Putin’s government, as it tries to reinvigorate the Russian economy – which remains the sixth biggest in the world on a PPP basis, adjusted for living standards.
To most outside observers, relatively low growth seems unimportant. The RTS index of leading Russian shares boasted a year-to-date gain of 40.5% up until mid-December, placing this dollar-denominated composite among the world’s best- performing stock market benchmarks during 2019.
International investors have been rediscovering Russian markets – drawn by attractive dividends paid by state-run companies and the high yields on state bonds – despite on-going US sanctions. The ruble-based MICEX put on 26.5% over the same period – more than twice the rise of the MSCI EM index of leading emerging market stocks.
Putin is keen to secure a sustained rise in growth and living standards before a new State Duma is elected in 2021 and prior to the next Presidential contest in 2024, by which time he will be 72 years old and, anyway, constitutionally obliged to step down.
Soon after the 2018 Presidential vote, the government carried out several tough reforms – raising both VAT and the retirement age, passing unpopular laws early in the electoral cycle. Yet, while Putin now talks about higher growth, he still presides over an economic policy-making model, which
Opinion 51 appears to prioritize the accumulation of reserves and
budgetary restraint above everything else.
Russia will this year run current account and fiscal surpluses equal to 4.6% and 1.6% of GDP respectively – demonstrating this “safety first” approach. State debt is equivalent to 13% of GDP – among the lowest in the world. On top of that, lingering heavy regulation and the actions of the siloviki (the security services) are clearly constricting private investment.
The effectiveness of budget spending is also in doubt. Putin’s RUB25.7 trillion ($390bn) investments planned for the 12 national projects – a series of infrastructure initiatives – has been proceeding rather slowly, amid rows over procurement. Russia has become, in emerging market terms, a slow-growth economy – managing annual real GDP growth of well below 2% over the last three years that are below the global average growth rate. And, while he wants to see an improvement, Putin’s interest in the details of economic policy appears to have waned over the last twelve months.
“How do we kick-start growth – that is the biggest question the government faces,” declares Russian Deputy Finance Minister Alexei Moiseev, speaking with me during a Renaissance Capital event in London this autumn. “Capital market reform has progressed strongly, but business is still over-regulated,” he acknowledges. “We’re working on a regulatory guillotine, finally getting rid of the remaining Soviet era legislation –
the idea is that all business regulations from before the mid- 1990s will be scrapped”.
The recent introduction of mandatory electronic tax declarations means “the de facto tax burden on business has risen as more and more activity has come onto the books”, says Moiseev. “We need to look at the idea of a tax holiday for small- and medium-sized enterprises”.
“International investors have been rediscovering Russian markets drawn by attractive dividends paid by state-run companies and the high yields on state bonds”
Explaining how “overseas debt has caused us a lot of problems in the past, as currency values have shifted”, Moiseev indicates that the Russian government is “keen to discourage firms from borrowing in foreign currency”. The CBR, he says, is “slowly introducing regulations to discriminate against the holding of foreign currencies in Russian banks”.
The exception is China – given growing links between Moscow and Beijing, the most recent symbol of which is the opening
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