Page 7 - RusRPTMar19

directly or indirectly benefiting from budget spending.
The speech also represented a major shift in the Kremlin’s thinking, away from modernising the army and back to towards creating more prosperity for the Russian people. While military reforms needed to be able to face down Nato will continue, between 2012 and 2018 the budget was wholly focused on military modernisation at the cost of the public’s standard of living. Putin clearly thinks that the external threats have been countered and it’s time to switch back to deal with the internal political threats to his rule.
But the jury is still out if the Kremlin can lift Russia up by its bootstraps.
Minister of Economy Maxim Oreshkin admitted in February that the 2.3% GDP growth result for 2018 – a six year high —was “not sustainable” and “due to one-off factors.”
The macroeconomic results from the start of this year were poor. Industrial production was down from 2.3% in 2018 to 1.1% in January. The PMI manufacturing index fell again to 50.1 from 50.9 in December to just above the 50 no-change mark.
Retail sales growth slowed to 1.6% y/y from 2.9% in 2018. This was tied in with nominal wage growth easing to 5.2% y/y in January from 7.3% in December, and partly caused by an increase in inflation to 5% from 4.3% over the period. Indeed inflation is going to be a key number in 2019. After it fell to a post- Soviet record low of 2.3% in the middle of 2018 it finished the year at 4.3%, above the Central Bank of Russia (CBR) target rate of 4%, and is expected to rise to around 5-6% in the middle of this year, before falling off again in the second half of the year.
But despite this slowdown Russia is running a triple surplus again in the trade, current account and federal budget accounts – the budget and current account surpluses are currently at record highs – which gives it some wiggle room. Oil prices are expected to average $65 this year and there is a key OPEC meeting in April where the production cuts to keep oil prices at this level are almost certainly going to be prolonged.
This year will see the launch of many of the 12 national programmes as the government starts to push some flesh on the bones of the plan. Putin mandated RUB25.7 trillion ($390bn) of investments planned for the 12 national projects and named a handful of infrastructure modernisation programmes to be implemented during 2019–2024, although infrastructure will account for a third of the overall spending. The twelve national priority areas comprise 69 federal-level projects that will cost approximately 4.5% of 2018 GDP. While 70% of funding is supposed to come from budget, it is still unclear how much of an increase in budget spending, if any, will be required to cover the costs.
Geopolitically the big event will be the completion of a series of new big gas pipelines: the Power of Siberia pipe linking Russia to China is finished; Nord Stream 2 pipeline linking Russia to Germany is ahead of schedule and will be completed in the fourth quarter; and Turk Stream linking Russia to Turkey and on to southern Europe is well underway and should be finished next year. This trident of pipes will improve Russia’s cash flow and its geopolitical capital.
The bottom line is even if the Kremlin misses all the ambitious goals laid out in
7 RUSSIA Country Report March 2019 www.intellinews.com