Page 5 - RusRPTJul19

1.0 Executive summary
Russia’s economy is off to a very weak start in the first quarter. Russian GDP growth slowed to 0.2% in May from a revised rate of 1.7% in the previous month, the Russian Economy Ministry said on June 21 and growth in the first quarter was a mere 0.5%.
The Russian central bank said in June it had lowered its 2019 GDP forecast to 1.0-1.5% from 1.2-1.7%, although analysts say growth will pick up in the second half of the year and should finish 2019 at around 1.5%.
The weak figures were reflected in weak industrial output results in May.
After growing by a strong 4.7% y/y in April, manufacturing production fell by 1.0% y/y in May. While these figures were depressed by calendar effects, output also fell by 0.8% m/m in working-day and seasonally-adjusted terms. At the same time, mining production growth slowed as oil output was cut as part of Russia’s deal with OPEC.
Meanwhile, activity in the retail sector remained soft. After coming in at a two-year low of 1.2% y/y in April, retail sales growth only edged up to 1.4% y/y in May. And there was only a very small rise in construction output last month. Following a bleak Q1, when the economy expanded by just 0.5% y/y, it doesn’t appear that there has been much of a recovery in Q2.
The good news is that inflation eased, after rising to over 5% in the first quarter from record lows of around 2.3% last summer, it has started to fall again, and faster than anyone was expecting. Inflation eased from 5.2% y/y in April to 5.1% y/y in May, which was weaker than the Central Bank of Russia (CBR) had anticipated.
The Central Bank of Russia (CBR) already took advantage of the more benign climate to cut rates by 25bp in June to 7.5% which will help the growth story this year and analysts are widely expecting a second rate cut later this year.
Russia’s strong fundamentals and the fading sanctions fears allowed the state to get a fresh $2.5bn Eurobond away in a dual tranche with maturities of 3.9% and 4.3% respectively. Russia has all but fulfilled its borrowing programme on the international markets and has begun to slow its issues on the domestic market after a run of record large issues in the first quarter.
The stock market has soaed and was up by 30% YTD at the end of June, partly driven by a surprise double hike in Gazprom’s dividend that saw the stock soar by 40% in a matter of days. The Ministry of Finance has been insisting all state-owned enterprises (SOEs) pay 50% of their profits as dividends and now they almost all are. Those that have not reached 50% this year will do so next year.
Interestingly the hike in Gazprom’s dividend payments has lifted the average dividend yield for Russian stocks to 7.9% -- not only the highest in the world but also more than the Russian Ministry of Finance ruble- denominated OFZ treasury bills pay, which has dropped to below 8%. For the first time ever Russian equities are yielding more than stocks.
5 RUSSIA Country Report July 2019 www.intellinews.com