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bne February 2019 Outlooks 2019 I 41
in several years – but will prob- ably fall to 2.3% after all the end of the year spending in the budget.
Oil was averaging of $75 in the third quarter, but was hit with more weak- ness in the fourth quarter and now there is some confusion over where the price of oil will go in 2019.
In December the CBR lowered the forecast for the average annual price of Urals oil in 2019 to $55 per bar- rel from $63, noting that, thanks
to the fiscal rule, a decrease in the price of oil will slightly affect the main macroeconomic parameters.
In November alone budget revenues jumped 46% year-on-year to RUB1.5 trillion, out of which oil revenues were up by 68.4% y/y and non-oil
by 23% y/y. The last time the federal budget was in a headline surplus was in 2011 when revenues exceeded expenditures by RUB442bn.
In December the government reduced its outlook for oil from $63 to $50, which is also the breakeven price of the budget, down from $53 in mid-2018.
Still, even with the lower oil prices the World Bank estimates Rus-
sia will run budget surpluses from now of 1.8% of GDP in 2019, 1.1% in 2020, and 0.8% in 2021.
Oil prices will be supported in 2019 by a new Opec+ deal that agreed to cut production by 1.2mmb/d from
Russia industrial production vs PMI index
the average October 2018 level. Of this, Russia is to contribute 228kb/d, down from its previous deal promise to cut 300kb/d, but it still produc- ing record amounts; oil production in Russia reached an all-time high
of 11.4mmb/d in October 2018.
In keeping with the prudential auster- ity policies, the Ministry of Finance has used the autumn windfall to cut its borrowing plans. The ministry is allowed to borrow RUB1 trillion a year for the next three years according to the budget but in November slashed
it planned borrowing by RUB380bn ($5.7bn) in 2018 to RUB564bn.
And the finance ministry was finding it hard to raise money anyway thanks to the politics. Foreign investors’ share in the workhorse treasury bond, the OFZ, had fallen from a peak of 34%
of outstanding bonds to 24% at the close of the year as foreign investors sold some RUB500bn of bonds. The finance ministry had a four-week break in auctions forced on it due to lack of demand, while the rates on the OFZs have soared from circa 7% at the start of 2018 to circa 9% at the end of the year.
Finance Minister Anton Siluanov has said that OFZs will not be placed at unfavourable market conditions, but with a RUB1 trillion borrowing plan
for 2019 where foreign investors will account for at least a quarter of the sales, the nature of the new sanctions could heavily impact Russia’s ability to borrow as well as pushing up the cost of money.
Current account
The high oil prices also gifted Russia a very favourable trade balance in 2018. After fears in early 2018 that Russia’s cur- rent account may fall into deficit, the sur- plus swelled in the second half of the year on the back of high oil prices to reach
an all time high of $104bn in 11M18.
And this record was despite rising capital outflows. The net capital outflow for the 11 months amounted to $58.5bn (+3.3x) having intensified in November to $16.3bn (from $10.3bn in October) despite the slower exit of non-residents from the OFZ market. For 2019 the CBR estimates capital flight will fall to $20bn.
"Many have asked why next year the bal- ance of the financial account in the private sector will be $20bn outflow if this year it is projected at $67bn. In addition to lower oil prices, the reason is the suspension and then the resumption of foreign currency purchases by the Bank of Russia within the budget rules," Nabiullina explained. In December she affirmed that the CBR will be back in the currency market in 2019. At the same time the sell off in OFZ in 2018 is thought to have ended.
While oil prices are at half the level they were in the boom years of 2000-2008, Russia Inc is a lot more profitable then it was then. With the breakeven price of the budget at only $50, significant cost cutting and higher efficiencies have improved the government position enormously.
In addition the government has found new sources of revenue. Improvements in tax collection contributed about a fifth of the 2018 budget surplus while rising grain exports are playing an increasingly impor- tant role in Russia’s trade balance. Grain earned a whopping $20bn in exports
in 2018 and is expected to continue to grow in importance in the coming years.
Corporate profits
The economy maybe growing slowly but that is causing a consolidation in many sectors – especially retail and banking – that has seen corporate profits soar as bigger companies reap the benefit of economies of scale.
Russian companies had their most
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