17/5/18" Timeline of Russian Growth 1992-2023 (forecasts)

I have annotated the timeline of Russia's GDP per capita from 1992 through forecast (IMF) out to 2023 with the inflation dynamics and presidential terms. For comparison, BRICS ex-Russia GDP per capita dynamics are presented as well.

Draw any conclusions you want:

28/7/17: 1H Marker: Russia on Track to a Weak Recovery in 2017

A quick top level update on the Russian economy from Bofit and Fitch Ratings.

Fitch Ratings today: “The recovery in Russia continues to gain traction. Domestic demand is responding to greater confidence in the economic policy framework, particularly as the inflation-targeting regime becomes entrenched. Activity in Turkey has bounced back rapidly from the coup attempt, with growth hitting 5% yoy in 1Q17. Momentum was supported by government incentives, including temporary fiscal measures and a jump in the Treasury commitment to the fund that backs lending to SMEs.”

Chart from BOFIT confirms the above:

Overall, the recovery is still on track, and remains gradual at best, posing elevated risks of reversals. For example, industrial output, having previously posted gains in January-May 2017, contracted in June 2017 on a quarterly basis. Still, industrial output was up 2% in 1H 2017 y/y.  Despite the U.S. and European sanctions, and generally adverse trends in the commodities sectors, mineral extraction sector expanded 3% y/y in 1H 2017 according to BOFIT. Oil output was up 2% and gas output was up 13%. The above figures imply that higher value added manufacturing posted sub-1% y/y growth in 1H 2017.

Agricultural production was basically flat - due, in part, to poor weather conditions, rising only 0.2% y/y in 1H 2017 and unlikely to post significant growth for FY2017 as crops reports are coming in relatively weak. That said, 2015-2016 saw record crops and very strong growth in agricultural output, so barring a major decline this year, agricultural sector activity will remain robust. Food production sector was the fourth highest growth sector over 2013- 1H 2017 period across the entire Russian economy, rising cumulative 17%  in 1H 2017 compared to 1H 2013 in real (inflation-adjusted) terms.

Construction sector posted a robust 4-5 percent expansion in 1H 2017 compered to 1H 2016, a rather positive sign of improving investment.

Pharmaceuticals (+36%), plastics (+25%), Chemical industry (+22%), paper industry (+19%) were the main sectors of positive growth over 2013-2017 period, according to data compiled by Rossstat.

Really good news is that household demand is now recovering. Retail sales by volume were up ca 1% y/y on a seasonally-adjusted basis and real disposable household income rose from the cycle lows to the levels last seen in May-June 2016. Bad news is that with income growth slower than retail sales and even slower than actual household consumption (which grew faster than domestic retail sales due to accelerating purchases abroad), Russian households are dipping into savings and credit to fund consumption increases.

We shall wait until July 2017 PMI figures come out over the next few days to see more current trends in the Russian economy, but overall all signs point to a moderate 1H and 3Q (ongoing) expansion in the economy, consistent with 1.2-1.3% real growth. The Economy Ministry recently reiterated its view that Russian GDP will expand at more than 2% rate in 2017. Achieving this will clearly require a large and accelerated cut in the Central Bank rate from current 9% to below 8%. Even with this, it is hard to see how above-2% growth can be achieved.

Agricultural and food production are quite significant variable in the growth equation. In 2016, Russia became number one exporter of wheat in the world, with annual production tipping 120 million tons - historical record. Bad weather conditions in 2017 mean that current expected output is estimated at around 17% below 2016 levels. Russia consumes 70 percent of its wheat output internally, so cuts to exports are likely to be on the magnitude of 1/2 or more in 2017. Domestically, food prices inflation is rising this year, threatening overall Central Bank target and putting pressure on CBR to stay out of cutting the key policy rate. Inflation rose in June to 4.4% - moderate by historical standards, but above 4% CBR target.

28/4/17: Russian Economy Update, Part 4: Aggregate Investment

The following is a transcript of my recent briefing on the Russian economy. 

This part (Part 4) covers outlook  for aggregate investment over 2017-2019. Part 1 covered general growth outlook (link here), part 2 covered two sectors of interest (link here) and part 3 concerned with monetary policy and the ruble (link here).

From the point of Russian economic growth, investment has been the weakest part of the overall ex-oil price dynamics in recent years.

Rosstat most recent data suggests that the recovery in seasonally adjusted total fixed investment continued in 1Q 2017, with positive growth in the aggregate now likely for the 2Q 2017:

• 4Q16 investment was down about 1% from 2015
• Total investment rose from 22.12% of GDP in 2015 to 25.63% in 2016, and is expected to moderate to 22.23% in 2017, before stabilsing around 22.9% in 2018-2019
• The investment dynamics are, therefore, still weak going forward for a major recovery to take hold
• However, 2017-2019 investment projections imply greater rate of investment in the economy compared to 2010-2014 average
• However, last year fixed investment was down by 11% from 2014
• This is primarily down to Rosstat revision of figures that deepened the drop in investment in 2015
• About a quarter of total aggregate investment in Russia comes from small firms and the grey economy
• Rosstat data suggests that such investment was roughly unchanged in 2016 compared to 2015
• Other fixed investments, which are mostly investments of large and mid-sized companies, shrank by about 1% in 2016
• This compounds the steep drops recorded in the previous three years (down 10% in 2015 alone), so the level of investment last year remained below that of the 2009 recession
• Investments of large and mid-sized companies within oil & gas production sector rose robustly in 2016
• This marked the third consecutive year of growth in the sector
• Much of the increases was driven by LNG sub-sector investments which is associated (at current energy prices) with lower profit margins 
• On the positive side, investments in LNG facilities helps diversify customer base for Russian gas exporters - a much-needed move, given the tightening of the energy markets in Europe
• In contrast to LNG sub-sector, investment in oil refining continued to shrink, sharply, in 2016 for the second year in a row, 
• Other manufacturing investment also recorded continued sharp declines
• The same happened in the electricity sector
• In contrast, following two years of contraction, investment in machinery and equipment stabilised for the mid- and large-sized corporates
• Construction sector activity was down 4% y/y in 2016, marking third consecutive year of declines
• Exacerbating declines in 2015, commercial and industrial buildings completions fell again in 2016
• Apartments completions also fell y/y marking the first drop in housing completions since 2010

As the chart above illustrates:

• The forecast if for 2017-2019 improvements in investment contribution to growth, with trend forecast to be above 2010-2014 average
• However, historically over 2000-2016 period, investment has relatively weak/zero correlation (0.054) with overall real GDP growth, while investment relative contribution to growth (instrumented via investment/growth ratio) has negative correlation with growth even when we consider only periods of positive growth
• This implies the need for structural rebalancing of investment toward supporting longer-term growth objectives in the economy, away from extraction sectors and building & construction

Going forward:

• Russia's industrial / manufacturing production capacity is nearing full utilisation 
• The economy is running close to full employment
• Leading confidence indicators of business confidence are firming up
• Corporate deleveraging has been pronounced and continues
• Corporate profitability has improved 
• Nonetheless, demand for corporate credit remains weak, primarily due to high cost of credit 
• Most recent CBR signal is for loosening of monetary policy in 2017, with current rates expected to drop to 8.25-8.5 range by the end of 2017, down from 10% at the start of the year
• Irrespective of the levels of interest rates, however, investment demand will continue to be subdued on foot of remaining weaknesses in structural growth and lack of reforms to improve business environment and institutions

Taken together, these factors imply that the recovery in fixed investment over 2017-2019 period is likely to be very slow, with investment recovery to pre-2015 levels only toward the end of forecast period.

Thematically, there is a significant investment gap remaining across a range of sectors with strong returns potential, including:

• Food production, processing and associated SCM;
• Transportation and logistics
• Industrial machinery and equipment, especially in the areas of new technologies, including robotics
• Chemicals
• Pharmaceuticals and health technologies

28/4/17: Russia Cuts Headline Rate by 50bps

Bigger than forecast move by the Russian Central Bank to cut rates (down 50bps against consensus - and my own - forecast of 25bps cut) signals the CBR's comfort with inflationary expectations forward.

As noted in my regular advisory call on the Russian economy earlier this week (transcript here), inflation fell substantial in 1Q 2017, with current FY 2017 forecast sitting at around 4.3 percent. In line with this, CBR started cutting rates at the end of March, moving from 10% to 9.75% for its benchmark one-week auction rate. Today, the CBR lowered the rate to 9.25%.

According to CBR: "“Inflation is moving towards the target, inflation expectations are still declining and economic activity is recovering. Given the moderately tight monetary policy, the 4 percent inflation target will be achieved before the end of 2017 and will be maintained close to this level in 2018-2019.”

Median Bloomberg estimate is for the rate to fall to 8.5% by the end of the year. As I noted in the call: "I expect ...year-end (2017) rate target of around 8.25-8.5% if inflation remains on the path toward 4.3% annual rate, or 8.75-9% range if inflation stays around 4.6% annual rate".

The latest move helps the cause of the Federal budget (championed by the Economic Ministry) that needs to see ruble lose some of its attractiveness as a carry trade currency. In recent months, ruble has been the third best performing currency in the world, resulting in investors willing to borrow in foreign currencies to invest in rubles denominated assets. The net effect of this on the Russian economy is improving demand for imports and deteriorating budget dynamics (as Russian budget operates ruble-based expenditure, funded to a large extent by dollar and other forex revenues from exports of primary materials).

Nabiulina's move today, however, should not be interpreted as the CBR surrender to the Economic Ministry agenda of lowering ruble value. Instead, the rate cut is clearly in line with inflation targeting and also in line with previously stated CBR concerns about investment environment in Russia. Russian aggregate investment has been extremely weak in recent years, and economic recovery needs to involve a dramatic reversal of investment volumes to the upside, especially in areas of technology, R&D, and product and processes innovation. High interest rates tend to significantly reduce investment by making capital expenditure more expensive to fund.

27/4/17: Russian Economy Update, Part 3: Ruble and CBR Rates

The following is a transcript of my recent briefing on the Russian economy. 

This part (Part 3) covers outlook  for ruble and monetary policy for Russia over 2017-2019. Part 1 covered general growth outlook (link here) and part 2 covered two sectors of interest (link here).

Outlook for the ruble and CB rates

The ruble has appreciated this year about 6.6% against the US dollar, from 61.15 at the start of 2017 to just above 57.10 so far, and 3% against the euro from 64.0 to 62.06, compared to the start of 2016, ruble is up on the dollar ca 21.3% and on the euro some 22.4%

• The ruble has been supported by the strengthening in the trade surplus in late 2016 into early 2017, and by improved foreign investment inflows
• The ruble has been on an upward trend after hitting the bottom at the start of 2016
• However, rate of appreciation has fallen in recent months, while volatility has risen
• March real effective (trade-weighted) exchange rate (RER) was up nearly 30% y/y, as reported by BOFIT (see chart below)
• As noted by some researchers (e.g. BOFIT), “in Russia, exchange rate shifts tend to pass through relatively quickly and strongly to consumer prices, so ruble strengthening tends to curb inflation” which, in turn, increases private and fiscal purchasing power
• Another effect of the ruble appreciation is that it lowers government ruble-denominated tax revenue through direct link between energy exporting taxes (oil and gas) and oil prices, which are denominated in dollars 

For domestic businesses, a stronger ruble:

• Reduces their price competitiveness with respect to imports, but also 
• Lowers the cost of imported capital, technology and intermediates
• Majority of Russian manufacturers are relatively highly dependent on such imports and have very limited non-ruble exports

• Stronger ruble has very limited effect on the volume of Russian exports, primarily due to heavy bias in exports in favour of dollar-denominated energy and other primary materials
• Ruble appreciation reduces the costs of foreign debt service for firms (a positive for larger firms and banks) and can lead, over time, to lower borrowing costs within Russian credit markets (a positive for all firms)

In line with the export-import effects discussed above:

• Volume of Russian exports grew by over 2 % last year (primarily driven by oil and gas prices recovery and continued elevated volumes of Russian production of primary materials), plus by another (second consecutive) year of grain harvests 
• In 2017, export growth should slow as both harvest and energy prices effects dissipate
• Volume of exports of goods and services fell 1.87% in 2014, 0.41% in 2015 and 0.68% in 2016. Current forecasts suggest that the volume of exports will rise 4.5-4.6% in 2017
• Volume of imports was much harder hit by the crisis
• Volume of imports of goods and services fell 7.6% in 2014, followed by 25.0 drop in 2015 and 4.0% decline in 2016
• Current forecasts suggest strong, but only partial recovery in demand for imports, with volumes expected to rise 7.0-7.2% in 2017
• Key driver for imports growth will be the recovery in aggregate demand, plus appreciation of the ruble
• Key downward pressure on imports will continue to come (as in 2016) from trade sanctions and from ongoing reforms of public and SOEs procurement rules and systems (more on this later)
• Russia’s current account surplus contracted last year to less than 2% of GDP, printing at USD 22.2 billion, down from USD69 billion in 2015
• 2017 projections of the current account surplus range widely, although no analyst / forecaster projects a negative print, despite expected increase in imports
• IMF’s most current (April 2017) projection is for 2017 CA surplus of USD51.5 billion
• This level of CA surpluses would stand above the 2014-2016 average (USD 49.6 billion), but below 2010-2013 average (USD67.4 billion) and lower than 2000-2007 average (USD 55.7 billion)
• If IMF projection comes through, CA surplus will be supportive of significantly tighter fiscal deficit than currently projected by Moscow
• As a percentage of GDP, CA surplus is expected to come in at 3.30% in 2017, slightly above 2014-2016 average of 3.19% and slightly below the 2010-2013 average of 3.42% of GDP

Inflation

• With Russian inflation falling and current account surplus strengthening, 2017 will witness further pressures on the ruble to appreciate vis-à-vis the dollar and the euro
• Russia’s annual inflation fell below 5% in 1Q 2017
• The CB of Russia has kept a relatively tight monetary stance, holding the key rate at nearly 10% through most of 1Q, as consistent with the CBR strict targeting of the inflation rate (4% inflation target set by the end of 2017)
• CBR dropped rate to 9.75% at the end of March, noting a faster-than-expected drop in inflation and a slight decline in inflation expectations 
• Inflation fell from 4.6% in February to 4.5% in March and 4.1% as of mid-April
• 12-month forecast now at 4.3%
• CBR governor Nabiullina said the central bank does not share the finance ministry's view of a overvalued ruble, which is consistent with her projecting continued cautious stance on inflation
• Finance Minister, Anton Siluanov, recently stated that the ruble is overvalued by 10–12%
• Consistent with this, I expect a 25 bps cut at April 28th meeting of CBR Council and year-end (2017) rate target of around 8.25-8.5% if inflation remains on the path toward 4.3% annual rate, or 8.75-9% range if inflation stays around 4.6% annual rate

27/4/17: Russian Economy Update, Part 2: Two Key Sectors

Two key sectors to watch

Now, looking at some sectors across the Russian economy

Manufacturing:

• In 2015, total volume of manufacturing output dropped 5.4% and in 2016 it was basically unchanged on foot of robust growth in the chemical sector (+5.6% growth) and food sector (ca 2% growth)
• Other positive growth sectors were Pulp & Paper and Rubber & plastics, Wood products and Machinery and Equipment. The latter sector has been in a free-fall since 2012
• Negative growth continued in Transport vehicles (negative growth since 2014), Metals and products (also in decline since 2014)
• Production of oil products fell, ending years of growth starting even before 2007
• Construction materials experienced their second year of declining output
• Electrical machinery & equipment continued to contract for the fourth year in a row

• Corporate Leverage:
• Overall, economy continued to deleverage out of debt, especially external debt. CBR data shows that by the end of 2016, private sector external debt stood at USD470 billion, of which more than ¾ was held by non-financial corporates and ¼ held by the banks.
• The external debt/GDP ratio was stable and benign at 36%
• Corporate debt is largely - 80% - non-ruble denominated, while the same number for the banks was around 87%
• Corporate deleveraging slowed down substantially in 2016 as debt rollovers fell and debt renegotiations/restructurings declined
• Changes in ruble valuations had positive effect on debt burden in the oil and gas sector (forex earnings) and negative effect on debt burden in domestic producers
• If in 2014-2015, companies used receipts of funds from parent holding enterprises to roll over maturing debt, in 2016 these funds were increasingly used to pay down debt. In effect this means that the first part of the deleveraging cycle has swapped external debt for internal debt, while current phase of the cycle is witnessing overall debt levels reductions.

Banking sector:

• In contrast to 2014-2015, the ruble valuations acted largely to reduce debt burdens in the banks, as ruble appreciation in 2016 supported the forex valuation of the foreign debt 
• Banks deleveraging continued in 2016, at a pace that is roughly ½ the rate of 2015 and 2014 
• Data from the CBR show total banking sector assets fell last year by 3.5% in nominal terms
• Controlling for FX effects (ruble appreciation), total assets were up ca 2% at the end of 2016, compared to the end of 2015
• Stock of loans outstanding to the corporate sector was down roughly 4%, while stock of loans to households rose by more than 1%
• However, overall household credit contracted 7% in 2015, making 2016 recovery weak 
• Non-performing loans (NPLs) are declining as a share of the assets base, with decline accelerating in recent months
• NPL ratio for corporate loans still exceeded 6%
• Household credit NPL ratio was about 8%
• Aggregate banking sector 2016 profits rose five-fold to $15 billion y/y
• Three large SOE banks (Sberbank, VTB and Gazprombank) accounted for over half of the banking sector profits
• The CBR has continued to weed-out poorly run and non-performing banks using tools ranging from full shut down to forced mergers 
• At the start of 2017 there were 623 active credit institutions in Russia, of which 205 institutions had general banking licenses
• At the same time in 2016 there were 733 active credit institutions

26/4/17: Russian Economy Update, Part 1: Growth Outlook

The following is a transcript of my recent briefing on the Russian economy. This part (Part 1) covers general economic outlook for Russia over 2017-2019. 

Growth outlook and recovery analysis

Russia's Composite PMI = 56.7 in 1Q 2017, the strongest growth performance since 4Q 2006

• In both Manufacturing and Services sectors, Russian economy has outperformed in 1Q 2017 global economic growth momentum

• Russia is currently the strongest BRIC economy for the fourth consecutive quarter

• Russian Manufacturing PMIs averaged 53.2 in 1Q 2017, unchanged on 4Q 2016 and up on 49.1 average for 1Q 2016  

• 3rd consecutive quarterly PMI reading for Manufacturing that sits above 50.0 marker

• Russia Services PMI for 1Q 2017 came in at a blistering pace of 56.8, up on already significant growth in 4Q 2016 at 54.6 and significantly above 1Q 2016 reading of 50

• All in, this was the fourth consecutive quarter of Services PMIs above 50.0

• Energy and commodities prices

• Lack of structural reforms within Russia

• Key support was higher output in natural gas and the broader extractive sector (+ more than 1% y/y in 1Q 2017)

• Seasonally adjusted manufacturing output recovered in March, but still down almost 1 % y/y.

• Growth will be led by private domestic demand which also stimulates imports; and

• Firmer oil prices.

• The latest forecasts of the CBR and Econ Ministry expect GDP increasing by 1–2% pa over 2017–2020

• The forecasts assume the annual price of Urals crude to average USD40–50 a barrel

• Key drivers for growth assumed to be household consumption and fixed investment (both expected to rise 2–3 % pa)

• In contrast, imports are expected to outpace in growth terms exports, with current account surplus falling, although remaining in the ‘black’ at USD6-8 billion range

• The financial account deficit (excluding currency reserves) is expected to be within the range of USD6–10 billion annually

• GDP growth will be expected to fall to around 1% if Urals price falls to USD35 a barrel and zero growth will kick in at the USD25 per barrel. This astonishingly low level for zero growth oil price is a testament to aggressive deleveraging of fiscal and private sector balancesheets during the 2014-2016 recession

• Approaching presidential elections of 2018 may put pressures on Moscow to increase public spending. While this would be running contrary to current budgetary plans, it will provide a short run boost to growth. However, such a boost would come at the expense of reducing Russian fiscal policy resilience in the longer term

• Continued tensions in Syria can spillover into a [limited] conflict involving Russia and either Turkey or the U.S.-led coalition or even the U.S. forces. Such an event would trigger massive spike in geopolitical uncertainties and will undoubtedly severely disrupt markets and investment flows, as well as global trade flows

• Emerging tensions (with growing Russian involvement) around North Korea, where Russian traditional role of being a distant secondary guarantor to China is gradually moving up the scale, just as China appears to be more accommodative of he Western demands

• Currently stable, but nonetheless risky and ambiguous outlook in Eastern Ukraine, with continued risk spillovers (albeit much more subdued) to Easter European politics

• Still evolving (and for now benign) re-alignment of powers in Central Asia that can spiral out of control 

• Emerging and occasionally visible (albeit relatively benign) policy confrontations with Belarus

• Potential for re-igniting of the Nagorno-Karabakh conflict

• Internal protests focusing on lack of meaningful anti-corruption reforms, especially set against the backdrop of continued, but abating, internal power struggles, involving some close past allies of the Kremlin – struggles that occasionally involve accusations of corruption and graft

• Internal issues relating to human rights abuses, especially and most recently, highly visible and robust accusations of suppression of LGBT minorities in Chechnya

Another factor is import recovery: 

• Imports recovery can run stronger than forecast, hitting largely modest in scale, although rather successful in the short run in some sectors, policies aimed at import substitution

• This stability suits both the West and Russia, where the sanctions are supporting domestic producer

• Given these dynamics, there is no pressure for Russia to abandon its current trade sanctions stance, despite the public statements by the Government to the contrary

• This is exemplified by the lack of changes in trade relations with Turkey post-normalisation of relations, and especially by March 2017 changes to Turkish tariffs on Russian exports of grains (corn and wheat)

• In mid-March this year, Turkey imposed 130% import tariff on imports of certain food items from Russia, including wheat and corn imports

• Although Turkey is one of the largest export markets for wheat and corn for Russian producers (Russian exports last year valued at roughly USD550 million), Russia did not attempt to trade food tariffs for its own import bans on Turkish products, including fruit and vegetables

• A year-old ban is beneficial to both Turkey and Russia from geopolitical perspective, even though it fuels higher inflation in Russia so much so that instead of relaxing its own prohibitions, Russia expanded the imports ban for Turkish goods to a wider range of plant materials

Overall, in the long run, achieving faster sustainable and resilient growth will require deeper structural reforms. These include: improving the business environment and institutional structures, accelerating modernization of the capital base and adoption of new technologies, raising R&D and technological capital investments, accelerating modernization of management systems, and significantly reducing the state share of the economy, including the extent of the State Owned Enterprises (SOEs) dominance across a range of sectors

• Implementation of such reforms will support private investment and raise productivity growth rates for both TFP and labour productivity

• Structural reforms would also reduce economy’s dependence on extraction industries and, if targeted toward processing sectors, can significantly improve value added component of these sectors, helping to de-link economic growth from energy prices and commodities prices in general

• While the Economic Ministry is now tasked with drafting a set of economic policy reforms to cover the period through 2035, to-date, we have no indications which reforms are being considered. We are unlikely to see any official drafts prior to the onset of the 2018 Presidential election campaigns, and the impact of any such reforms is unlikely to materialise before 2020.

Despite some robust numbers, the economy remains relatively exposed to the downside risks, including

Somewhat deflating the leading indicators, Rosstat reported that seasonally and workday-adjusted industrial output recovered in March on a relatively weaker February

After a two years-long recession, real GDP growth should be + 1.3-1.6% this year (mid-point 1.4-1.5%)

Continued sluggish performance in 2017-2019 is due to the economy already running near full capacity and lacking deeper structural reforms to boost long term growth potential. Thus, my expectation is for real GDP growth to remain around 1.4-1.5% mark over 2017-2019

Risks:

Biggest short-term risk (upside and downside): the price of oil

A second risk factor involves geopolitical and political triggers that could hit Russian growth outlook hard, either directly or indirectly via increased political instability and adverse investors’ and entrepreneurs’ perceptions

Relating to both, imports substitution drive and the issue of geopolitical risks, the current sanctions regime (for both Russian sanctions vis-a-vis Western producers and Western sanctions vis-a-vis Russian economy) appears to be stable

Stay tuned for more transcripts

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28/12/15: Russia: Unsurprisingly Surprising November GDP Print

Per latest report from the Economy Ministry, Russian GDP contracted 0.3% m/m in November in real terms and is down 3.7% y/y over 11 months through November 2015. Compared to 12 months ago, November GDP was down 4%.

This implies that, the economy will likely be down 3.8 percent (by my estimates: 3.8-3.9 percent) in 2015 as a whole. More significantly, with November GDP being down on foot of weaker oil prices and with crude prices continuing to contract through December, we are now less likely to see stabilisation in the economy (zero growth or return to positive growth) in 1Q 2016.

Meanwhile, in November, real wages were down 10% y/y while retail sales were down 13% for eleventh month in a row, according to Rosstat.

Rosstat data shows that over the last 12 months through November, food sales were down more than 11% and non-food goods sales fell nearly 15%. The figures for November 2015 show sharper contraction, in part because in November 2014 retail sales in Russia actually rose on foot of rapid devaluation of the Ruble. But overall, private consumption in Russia continues to run at a level consistent with where it was back in 2011. As noted recently by BOFIT, private consumption in Russia is still some 10 percent above where it was pre-crisis in 2008. Which is no mean feat, as for example, in the case of Ireland private consumption currently remains below its pre crisis levels despite the fact that Irish economy has been recovering very robustly from the crisis in recent years.

Rosstat data shows that seasonally adjusted industrial output fell again in November. Activity in extractive industries in November was unchanged from a year earlier, having supported the output to the upside in previous months. Manufacturing production, however, fell for the third month in a row, down ca 5% y/y in November. BOFIT noted that this suggests that “the impact of increased defence spending that supported manufacturing industries earlier this year is likely fading. First-half defence spending grew on-year by over a third, but since autumn defence spending has fallen.”

All of this supports negative view of the Russian economy going into 2016, summarised in my earlier post here: http://trueeconomics.blogspot.ie/2015/12/281215-bofit-summary-of-2016-outlook.html

The outrun so far has been quite disappointing for the forecasting hawks, including for example Danske Bank analysts who at the end of May 2015 predicted Russian economy will shrink 7.9% y/y in 2015 ( forecast they revised to -6.2% at the end of August 2015).

Or for that matter for seasoned hawks, like Andres Aslund who in January prediction put the matters thus: “Russia’s GDP is likely to plunge in 2015. Indeed, it would be prudent to expect a slump on the order of 10 percent. In many ways, Russia’s financial situation is eerily similar to the fall of 2008, when then-Prime Minister Vladimir Putin called his country a safe haven in the global financial crisis. In 2009, Russia’s GDP dropped by 7.8 percent. In other ways, the situation seems even worse.” (H/T to @27khv for the link: http://www.the-american-interest.com/2015/01/15/russias-output-will-slump-sharply-in-2015/).

But the outrun is also a bit on a reality check to some Russian political and Government figures (including President Putin and Prime Minister Medvedev) who bought into the fragile and dynamically uncertain improvements over Summer 2015 to announce the bottoming out of the economic crisis.

Truth is, Russian economy is a very hard nut to crack for any forecaster, as it is currently subject to a series of coincident shocks that themselves are hard to price and predict: oil prices and gas prices slump, contracting demand for energy globally, including on foot of both geopolitical changes and warm weather; broader commodities prices collapse, including on foot of global demand weaknesses and regional (e.g. China) weaknesses; geopolitical risks and sanctions (including financial sanctions); ongoing deleveraging of the Russian banking sector (including outside Russia, especially in Ukraine and the rest of the Former USSR and in parts of Central and Eastern Europe); domestic structural weaknesses (including those that started manifesting themselves in late 2011 and continue to play weak economic hand to-date); and so on. Thus, we shall be kind to forecasters and politicians making bets on Russian economy’s direction.

I wrote about most of the above already, including the banking sector woes (http://trueeconomics.blogspot.ie/2015/12/231215-vnesheconombank-where-things.html). And the trends in both manufacturing and services sectors were pretty clear in the PMIs (see http://trueeconomics.blogspot.ie/2015/12/41215-bric-composite-pmis-november.html).

But translating these indicators into actual growth performance is a perilous task... as the November figures showed.

20/12/15: Of those Russian GDP 2016 forecasts

In my recent column for Slon.ru (see: http://trueeconomics.blogspot.ie/2015/12/151215-russian-outlook-for-2016-slon.html) I quipped that in the case of the Russian economy, forecasts for 2016 growth rates might just as well be taken from the fortune tellers, as there are too many moving factors driving the economy, all of which are virtually impossible to forecast.

Now, h/t to @JoMichell, we have a picture of 'predictability' of one key driver of the Russian economy - oil prices. Please, keep in mind: these are Brent prices (Urals grade predictability is even lower, as Urals-Brent spread is subject to further uncertainty, including geopolitical risks and substitution risks, as discussed in my Slon.ru column).

So here is a chart showing IMF forecasts for Brent prices issued back in June 2015:

 Note that in the above, least probable downside scenario is for oil above USD40 per barrel through 2015. Alas, the least probable forecast is not exactly the lower bound for reality:

So here we have it: less than 6 months forecast out, and the least probable worst case scenario has been breached already. Good luck pinning Russian GDP forecasts down...

11/8/15: Russian 2Q growth: beating forecasts on the wrong side

With apologies for a slight delay (I am actually away from work these weeks), here is a quick update on Russian 2Q 2015 GDP figures.

Those who read my musings on the Russian economy would recall that in recent months we have been seeing some signs of stabilisation in the economy performance, albeit I have been reluctant to call these signs a full turnaround as data required robustness confirmation and broadening of any improvements.

Good thing I stayed more cautious on the matter of calling a recovery. In 1Q 2015, Russian economy shrunk 2.2% y/y, surprising on the positive side the consensus expectation of a 3.7% drop. However, this time around, 2Q 2015 preliminary estimate for real GDP growth came in at 4.6%, worse than consensus forecast for 4.5%.

Now, 0.1 percentage points on expectation is not quite ugly, but -4.6% is ugly. Thus, in itself, the 2Q 2015 figure does not quite put under sever pressure the expected 3.4-3.6% annual contraction for 2015 as a whole, but it does put question marks around the thesis of Russian economy's recovery.

The contraction in 2Q takes us into July-August when oil prices have fallen even further and ruble devaluation pressures returned - both making it hard for the CBR to cut rates to support economy.

Noticeably, acceleration in the decline can be seen in q/q seasonally-adjusted figures. These are yet to be released, but Capital Economics shows estimates of 2.5% q/q decline in real GDP on seasonally adjusted basis, nearly double the rate of contraction (1.3% q/q) recorded in 1Q 2015.

The charts below show just how ugly 2Q 2015 figures are on a historical perspective:

 and over the shorter horizon:

Source: both: Capital Economics

As noted by Barclays, much of the deterioration in growth in 2Q was down to oil prices

 Source: @Schuldensuehner

Although in terms of pressures on growth, consumption component of the Domestic demand remains weak.

Source: @Schuldensuehner

The CBR policy rates are clearly weighing on the consumption and investment ability to rebound, with high policy rate (11%) compounding already tight funding markets for the banks, resulting in very high cost of credit.

We have no details on the GDP figure breakdown, yet, but Capital Economics suggested that based on 2Q headline figure, household expenditure fell at a rate similar to 1Q 2015 (-8.9%). Which implies that it was industrial production that drove growth figures further down in 2Q 2015.

The latter point is consistent with the evidence from Manufacturing PMIs in recent months:

So what's the top level conclusion from all of this? 2Q was ugly. Signs of stabilisation in the economy are still present, but robustness of these signals is now more under question than a week ago. In simple terms, we will need to see Q3 data posting closer to 0% change in GDP and beating 1Q 2015 reading, if we are to confirm expectation for growth recovery in 4Q 2015 - 1Q 2016. 

3/8/15: IMF on Russian Economy: Debt Sustainability

In the previous post, I covered IMF latest analysis of Russian GDP growth. Here, another key theme from the IMF Article IV report on Russia: fiscal policy sustainability.

In its latest assessment of the Russian economy, IMF has reduced its forecast for General Government deficit for 2015, from -3.69% of GDP back in April 2015 to -3.3% of GDP in the latest report. However, in line with new Budgetary framework, the IMF revised its forecasts for 2016-2020 deficits to show poorer fiscal performance:

In line with worsening deficits from 2016 on, IMF is also projecting higher government debt (gross debt, inclusive of state guarantees):

Still, the IMF appears to be quite happy with the overall debt and fiscal sustainability over the short run and is taking a view that over the next 2-3 years, fiscal policy must provide some upside supports to investment.

One of the reasons for this is that IMF sees continued strong buffers on fiscal reserves side into 2020, with Gross international reserves of USD362.4 billion and 374.8 billion in 2015-2016 amounting to 13.6 months of imports and providing cover for 496% and 281% of short term debt, respectively.

Furthermore, IMF expects debt levels to remain benign, both in terms of Government debt and Private sector debt as the chart above shows.

Note: I will cover Private Sector Debt developments in a separate post, so stay tuned.

Overall, 

1) External debt situation remains positive and is improving in the sector with weaker performance (corporate sector):

Note: above figures do not net out debt written to Russian banks and corporates by their parent and subsidiary entities located outside Russia, as well as direct investment / equity -linked debt.

2) "...no sector shows maturity risk with short-term assets exceeding short-term debt in aggregate"

3) Fiscal stance appears to be expansionary, but moderate, with deficits below 4% of GDP forecast for the worst performance year of 2016.

4) "Exchange rate and liquidity risks are mitigated by the CBR's large reserve level"

Stay tuned for more analysis, including debt positions across various sectors.

3/8/15: IMF on Russian Economy: GDP Growth Upgrade for 2015-2016

IMF has just realised its assessment of the Russian economy. Several interesting aspects of this report are worth highlighting.

First up: economic growth projections. IMF actually upgraded, marginally, Russian forecasts for 2015-2016 across the key macroeconomic parameters. Here are three charts comparing GDP growth, Inflation and Current Account balance projections from the Fund across two separate reports: April 2015 WEO and today's Article IV.

And a summary of latest forecasts

Overall, small upgrade on GDP side compared to April release, for both 2015 and 2016. Expected return to positive growth in 2016 remains extremely weak and subject to huge uncertainty. Worse, when one looks into components of GDP, the picture that emerges is less 'positive'.

Domestic demand will likely remain a negative drag on growth though 2016, with expected improvement - albeit marginal - on investment side in 2017. Consumption, however, will remain a small contributor to the overall growth in 2018-2019. Investment is also to remain weak.

Structural nature of the slowdown is reflected in exceptionally weak productivity performance. This traces back to post-crisis period in its entirety. Russian economy did not experience a significant recovery on productivity growth rates post-2009 crisis and since 2010 there has ben a pronounced downward trend in productivity growth:

While relatively low unemployment is supported by decline in labour force participation rate (accelerating due to twin demographic problem of rising older and younger population shares, plus poor health performance amongst older adults):

Overall, however, declining labour force trend should have translated into increased productivity of the labour force. In Russian case, this is not happening.

Slight uptick in unemployment recently is likely to continue through 2015, but will not be enough to induce labour productivity growth acceleration:

The IMF forecasts come on foot of ruble posting woefully poor performance, falling to a 5-months low (http://www.bloomberg.com/news/articles/2015-08-03/ruble-drops-most-in-emerging-markets-with-crude-at-six-month-low) and with Manufacturing PMI showing acceleration in economic decline in July (http://trueeconomics.blogspot.ie/2015/08/3815-russia-manufacturing-pmi-july-2015.html).

All of this is hardly a pleasant reading. However, not all is as gloomy as the above headline figures imply. In particular, in several key areas, macroeconomic position is relatively strong. I will blog on these in subsequent posts.

26/6/15: Russian Economy: Domestic Demand Still Weak in May

Some latest Russian stats to scare the pants off everyone:

• Investment is down 7.5% y/y in May and in January-May cumulative drop in Investment is 5% y/y. 
• Retail sales are down 9% y/y in May and down 7.5% y/y in January-May 2015. January-May seasonally-adjusted sales, however are down primarily due to January drop.
• Real disposable incomes are down 5% y/y in both April and May.
• Industrial production is down 8% y/y in May, January-May decline is 4%.
• Estimated GDP is down 3.2% y/y in January-May 2015 based on Economy Ministry estimates and 3.4% y/y based on Vnesheconombank estimates. This suggests acceleration in contraction compared to 1Q 2015 when the economy shrunk 2.2% based on first revision of the earlier estimate. Latest consensus forecast is for full year real GDP decline of 2.7-3.5% on 2014.  Which is an improvement on past forecasts. 

Problem is, fifth month into the year, and the signs of stabilisation are still quite contradictory and major parameters on domestic demand size are still volatile. 

1/6/15: Russian GDP fell 2.4% in January-April 2015

When Russian statistics agency published the latest data on economic growth for 1Q, the numbers came in at -1.9%, of 0.3% higher than the previous forecast by the Ministry for Economic Development (MED).

Based on the latest data from the MED, we have:

• GDP growth at -1.4% in January (y/y figures), -1.3% in February, -2.7% in March, and -4.2% in April. 
• April decline, therefore was faster than in 1Q 2014, resulting in GDP contraction of 2.4% y/y in the first four months of 2015.

This deflates all hopes for economic stabilisation thesis as both March and April posted accelerating rates of economic contraction, with figure for April simply impossible to ignore, even though, in part, it was driven by faster growth in April 2014.

Seasonally-adjusted data is a little more encouraging: January 2015 real GDP decline was 1% m/m, followed by 0.9% m/m drop in February, March at -0.9%, and April at -0.8%. So we do have some moderation in monthly contraction, although

• This is seasonally-adjusted preliminary data, subject to potentially hefty revisions and seasonality impacts; and
• Latest PMIs are not encouraging (see manufacturing for May here: http://trueeconomics.blogspot.ie/2015/06/1615-russian-manufacturing-pmi-may-2015.html posting worsening conditions in May, and April data for services and composite here: http://trueeconomics.blogspot.ie/2015/05/7515-russian-services-and-composite.html).

In March, industrial production generally stagnated, with April posting a contraction of 1.2% m/m. In mining, March turned up positive output growth, with April again falling into contraction at -0.4%. Production and distribution of electricity, gas and water contributed positively to GDP growth in April, up 0.9%. Manufacturing posted -1.8% contraction in April. Agriculture posted zero growth in April, having expanded in 1Q 2015.

Fixed investment fell 0.7% in April, compared to -0.2% in March, construction was flat in April, after posting declines in January-March.

Retail sales were down 0.9% in April for goods trade and 0.6% in household services. Real disposable household income grew in April by 0.2%, while real wages shrunk 2%.

Meanwhile, official unemployment remained at 5.6% in April, although this figure is heavily skewed to the downside by several factors:

1. Significant decline in the numbers of migrant workers (see http://trueeconomics.blogspot.ie/2015/05/31515-remittances-from-russia-sharply.html);
2. Large shifts in employment from official enterprises to grey and black economy;
3. Demographic trends of shrinking working age population (note: Russia did return to actual population growth in 2013 and 2014, but working age population has been declining since 2006).

Total exports of good stood at USD32.7 billion or 31.3% lower than in April 2014, having rise 0.9% m/m relative March.. Imports of goods amounted to USD16.2 billion, 41.8% lower than in April 2014 and down 7.2% on March 2015. So trade balance was down 16.6% y/y to USD16.5 billion.

The good news came from a slowdown in inflation in April. In January, monthly inflation was 3.2%, falling in February to 2.2% and 1.2% in March. April inflation was 0.5% on a monthly basis and in January-April consumer prices rose 7.9%.


Full details of the latest releases in Russian are here.

30/5/15: Russian Demand Down Sharply in April

As BOFIT reports this week: Russian domestic demand shrunk at an accelerating rate in April with retail sales down 10% y/y after contracting 7.5% in 1Q 2015. Investment was down 5% in April, following 4% drop in 1Q 2015. Investment fall would have been even sharper if not for a massive +30% rise in volume of new housing completions (most likely a temporary rush to complete stock of unfinished housing int espouse to higher cost of carry).

Real wages declined also continued to fall in 1Q 2015, down 8% y/y, posting second consecutive quarterly decline. In April, real wages shrunk 13%. Pensions dropped 4% y/y in 1Q 2015.

Latest estimates from the Economy Ministry put Russian GDP at -4% in April, deeper than 1.9% contraction recorded in 1Q 2015.

24/5/2015: Russian Economy: Weaker April Signals Renewed Risks

When I remarked recently on some less negative than expected developments in Russian economy over Q1 2015, I noted that these were fragile signs of potential stabilisation and that the risks remain to the downside. April industrial production appears to signal the same. April industrial production numbers are down 4.5% y/y and manufacturing is down 7% - the rates of decline that are significantly sharper than recovered over 1Q.

Remember that Russian GDP fell 1.9% in 1Q 2015 y/y, based on preliminary estimates - a decline that is shallower than what was expected by the analysts. Overall output (GDP at factor cost) fell slightly more sharply - by 2.3% over the same time, while domestic demand (Consumption + Investment) fell at just under 7%. The gap between output and domestic demand declines can be in part explained by imports substitution going on across a number of sectors, such as food, agriculture, industry and manufacturing, plus improved trade volumes also driven by ruble devaluation.

The decline in industrial production and manufacturing signals a feed through from collapsing investment to production sectors, as well as continued weakness in consumption and strengthening of the ruble. More significantly, ruble firming up is not helping imports substitution-driven demand. CBR has now returned to buying forex and selling ruble in order to, both, increase its reserves and also sustain lower ruble. Higher ruble valuations hurt fiscal balance and at the same time inducing weaker external balances. As the result, CBR is now regularly purchasing USD100-200 million daily and is raising cost on banks' access to repo facilities.

All in - just another reminder that the Russian economy is not out of the woods yet. For all the positive developments in recent months, the situation remains fragile and structural drivers for growth are still lacking, so any recovery, if sustained, will have to come from either external demand factors (oil prices, commodities prices, etc) and/or imports substitution effect supported by lower CBR rates.