Page 6 - RusRPTDec18

1.0 Executive summary
Russia’s growth slowed to 1.3% in the third quarter due to a high base effect from last year’s record breaking harvest, but still the growth is significantly under potential. Russian GDP growth was down from 1.9% in the previous quarter and is on course to end the year at about 1.8% this year.
The Ministry of Economic Development has already downgrade growth forecasts twice this year as pressures on the economy increase and the government battens down the hatches in preparation for new “crushing “ sanctions by the USA.
Part of the reason for the slowdown was the Central Bank of Russia (CBR) decision to end the easing cycle and hike rates by 25bp in September to 7.5% in anticipation of ruble volatility fuelled by US sanctions that were expected in November, but now the decision has been put off until after Christmas.
However, industry has built up a little momentum with Russia's industrial output in October up 3.7% year-on-year growth, bringing January-October industrial expansion to 3% y/y. The growth improved notably from 2.1% y/y seen in September and confirms previous PMI report that showed manufacturing sector gaining momentum in October.
Both Russia’s industrial production and PMI indices extended their gains in November, although both are likely to be set back again in the December print by the brief fall fo oil prices to $53 in November before a rapid recovery to $63.
Although the industrial output is seen as "healthy" by the Sberbank CIB analysts on November 19, the boost as compared to September is largely attributed to low base (only 0.2% y/y growth posted for the same month of last year) and favourable calendar effects.
Extraction continued to be the best performer as oil production rises after the end of the OPEC deal to limit production. Russia is now producing a record 11.3mn barrels a day at a time when oil prices have traded to over $80. However, oil prices remain very volatile as after US president Donald Trump suggested he would push further US production prices tumbled to $65.
Oil prices have less impacted on the budget as all tax revenue earned on prices above $40 are sterilised and cant be spent so high oil prices have little effect on the currency or the budget. That said the government is running a RUB3 trillion budget surplus in October or 3.6% of GDP – the first surplus in nearly five years. With some 25% of all budget spending due in December this will fall, but Russia is on course to end the year with a 2.2% GDP surplus this year. The budget currently breaks even at oil prices of $53 and this breakeven price continues to fall steadily.
Next year the growth may be improved as in the 2019 draft budget the cap for oil price sterilisation in the so-called budget rule has been increased from $40 to $70 that will add an estimated RUB2 trillion to the circa RUB16 trillion of regular spending. Under Putin’s May Decrees the government is supposed to delivery GDP growth ahead of the global average – something it has failed to get anywhere near to so far.
6 RUSSIA Country Report December 2018 www.intellinews.com