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:

6/1/18: Spent 'Putin's Call' Means Growing Pressure for Reforms

Some interesting new trends emerging in Russian public opinion as the next Presidential election approaches. State-linked Russian

Academy of Sciences publishes relatively regular polls of public opinion that look into voters' preferences, including preferences for either "significant changes" in policy course in Russia or "stability" of the present course.

Here is the latest data:

Some 'Russia analysts' in the Western media have been quick to interpret these numbers as a sign of rising anti-Putin sentiment. Things are more subtle than that.

There is, indeed, a rather remarkable shift in public preferences in favor of "significant changes". Which can be attributed to the younger demographic who are predominantly supportive of reforms over their preferences for "stability". This is good. However, we do not know which changes the voters would prefer. Another potential driver for this shift is the ongoing weak recovery in the Russian economy from the 2014-2016 crisis - a recovery that fades to the background voters' previous concerns with the Russian State's geopolitical standing in the international arena (key pillar of Putin's third presidency) and the movement to the forefront of economic concerns (key pillar of Medvedev's interim presidency and, so far, an apparent area of significant interest for Putin looking forward to his fourth term).

These gel well with other public opinion data.

Here is Pew data from earlier 2017 showing that Russian voters nascent sentiment in favor of reforms may not be incongruent with their simultaneously continued support for Putin's leadership:

When one looks at the same polls data on core areas of domestic policy that the Russians feel more concerned about, these are: corruption (#1 priority), economy (#2 priority) and civil society (#3 priority). In other words, more liberal issues are ranked toward lower priority than other reforms (economy and corruption, which are both seen by the majority of the Russians as the domain of State power, not liberal order reforms). Civil society is an outlier to this. And an interesting one. Perhaps, indicative of the aforementioned demographics shift. But, perhaps, also indicative of the dire lack of alternatives to Putin-centric political spectrum in Russia. Again, whether the voters actually see Putin as a barrier to achieving these reforms is the key unknown.

Worse, not a single one area of domestic policies has plurality disapproval rating.

Somewhat confusing, Putin's personal approval ratings - for specific areas of policy - have been deteriorating over time:

This is significant, because traditionally, Russians view Presidential office as distinct from the Government (the 'good Tzar, bad Boyars' heuristic) and the tendency to view domestic objectives as key priorities or targets for disapproval would normally be reflected in falling support for the Government, not the President. This time around, things appear to be different: Russian voters may not be blaming Putin's Presidency outright, but their confidence in the President's ability to manage the policy areas of their key concerns is deteriorating.

The 'Putin call' - past bet on forward growth to sustain power centralization - is now out of money:

Weakest points are: corruption and economy. And these are the toughest nuts to crack for Putin's regime because it rests strong Federalization drive of 1999-present on the foundations of balancing the interests of the rent-seekers surrounding it (aka, on corruption around it, a trade-off between loyalty to the Federal State and the President, in return for access to wealth and the ability to offshore this wealth to the likes of London, a world's capital for grey and black Russian money).  Ironically, Western sanctions and broader policies toward Russia are actively constraining the scope and the feasibility of all reforms - be it reforms of the economy or civil society, anti-corruption measures or political liberalization.

Note: an interesting read on the changes in the Kremlin-backing 'opposition' is also afoot, as exemplified by the new leadership emerging within the Russian Communist Party (read this well-researched and unbiased view, a rarity for WaPo, via David Filipov: https://t.co/8OfqCZzdOY).

Taken together, the above suggests that Putin needs some quick wins on the hardest-to-tackle issues: corruption and economy, if he were to address the pivot in voters' preferences for change. The 'if' bit in this statement reflects severe uncertainty and some ambiguity. But assuming Putin does opt to react to changes in the public opinion, we can expect two policy-related moves in months ahead:

1. Corruption: we are likely to see public acceleration in prosecution of smaller/lower-end bureaucrats, deflecting attention from the top brass surrounding the centre. Alongside promotion of some fresh names to regional leadership posts (governors etc), already ongoing, we are also likely to see some additional consolidation of the oligarchic power in the economy. There will be no cardinal wide-spread change in power ministries and within the Deep State institutions. But, even the beginnings of such acceleration in cleaning up mid-tier of the top echelons of power will prompt hysterical comparatives to Stalin's purges in the Western media.              
2. Economy: we are also likely to see a new 'Program for 2030' aiming to 'modernize' the economy, deepen capital investment, on-shore funds stashed away in Cyprus, Austria, Germany, the Baltics, the UK and elsewhere. Note, the list of Russian-preferred offshore havens - it is littered with the countries currently beating the Russophobic drums, which will make such on-shoring double-palatable for Kremlin, and more acceptable to the Russian power circles. The process of on-shoring has already began, even if only in the more public and more benign context (https://www.bloomberg.com/news/articles/2017-12-21/russia-to-issue-fx-bonds-to-help-repatriate-cash-putin-says). The Program is also likely to see some reforms of the tax code (potentially, raising 13% flat tax rate and tweaking capital gains tax regime). A deeper push can come on enforcement and compliance side, with Moscow finally attempting to shift tax enforcement away from its current, highly arbitrary and politicized, practices. Putin is acutely aware of the fact that Russian public investment sits too low, while ammortization and depreciation are accelerating. We can expect some announcements on this front before the election, and, assuming economic growth becomes a new priority of the fourth term, an acceleration in State funding for infrastructure projects. This time around, new funding will have to flow to key public services - health and education - and not into large-scale transport projects, .e.g Crimean and Vladivostok bridges. Russia is well-positioned to support these initiatives through some monetary policy accommodation, with current inflationary dynamics implying that the current 7.75% benchmark CBR rate can be lowered to around 6% mark (this process is also ongoing). beyond fiscal and monetary aspects of reforms, Russia can opt to move more aggressively with revamping its Byzantine system of standards and certification systems to align them more closely to the best practices (in particular, those prevalent in the EU). Such alignment can support, over time, diversification of Russian exports to Europe and to other regions, where european standards effectively goldplate local ones.

What we are not likely to see, in the short term, is unfortunately what is needed as much as the above reforms: changes in legal and enforcement regimes. Poor legal enforcement and outdated, politicized and often corrupt judicial system are stifling entrepreneurship, enterprise scaling, international and domestic investment and, equally importantly, development of the civil society. It also weakens the Federal State by presenting a bargain in which local loyalty to Moscow is secured by allocating local authorities power to shadow justice systems. This bargain undermines voters' trust and reduces efficiency of resources flowing across regions and from Moscow.

As a number of more astute observers, e.g. Leonid Bershidsky (@Bershidsky) and David Filipov (@davidfilipov) have implied/stated in the past, promising reforms after nearly two decades in power will be a hard sell proposition for Putin. Which means Programs alone won't cut it. Kremlin will need to deliver and deliver fast, in order to break away from the 'Putin 3' track:

12/8/17: Some growth optimism from the Russian regional data

An interesting note on the latest data updates for the Russian economy via Bofit.

Per Bofit: "Industrial output in Russian regions rises, while consumption gradually recovers." This is important, because regional recovery has been quite spotty and overall economic recovery has been dominated by a handful of regions and bigger urban centres.

"Industrial output growth continued in the first half of this year in all of Russia’s eight federal districts," with production up 1.5–2% y/y in the Northwest, Central and Volga Federal Districts, as well as in the Moscow city and region. St. Petersburg regional output rose 3-4% y/y.

An interesting observation is that during the recent recession, there has been no contraction in manufacturing and industrial output. Per Bofit: "Over the past couple of years, neither industrial output overall nor manufacturing overall has not contracted in any of Russia’s federal districts. Industrial output has even increased briskly in 2015–16 and this year in the Southern Federal
District due to high growth in manufacturing and in the Far East Federal District driven by growth in the mineral extraction industries."

This is striking, until you consider the nature of the 2014-2016 crisis: a negative shock of collapsing oil and raw materials prices was mitigated by rapid devaluation of the ruble. This cushioned domestic production costs and shifted more demand into imports substitutes. While investment drop off was sharp and negative on demand side for industrial equipment and machinery, it was offset by cost mitigation and improved price competitiveness in the domestic and exports markets.

Another aspect of this week's report is that Russian retail sales continue to slowly inch upward. Retail sales have been lagging industrial production during the first 12 months of the recovery. This is a latent factor that still offers significant upside to future growth in the later stages of the recovery, with investment lagging behind consumer demand.

Now, "retail sales have turned to growth, albeit slowly, in six [out of eight] federal districts."

Here is why these news matter. As I noted above, the recovery in Russian economy has three phases (coincident with three key areas of potential economic activity): industrial production, consumption and investment. The first stage - the industrial production growth stage - is on-going at a moderate pace. The 0.4-0.6 percent annual growth rate contribution to GDP from industrial production and manufacturing can be sustained without a major boom in investment. The second stage - delayed due to ruble devaluation taking a bite from the household real incomes - is just starting. This can add 0.5-1 percent in annual growth, implying that second stage of recovery can see growth of around 2 percent per annum. The next stage of recovery will involve investment re-start (and this requires first and foremost Central Bank support). Investment re-start can add another 0.2-0.3 percentage points to industrial production and a whole 1 percent or so to GDP growth on its own. Which means that with a shift toward monetary accommodation and some moderate reforms and incentives, Russian economy's growth potential should be closer to 3.3 percent per annum once the third stage of recovery kicks in and assuming the other two stages continue running at sustainable capacity levels.

However, until that happens, the economy will be stuck at around the rates of growth below 2 percent.

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.

28/12/15: 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.

28/12/15: BOFIT summary of 2016 outlook for Russian Economy

Per recent BOFIT summary:

“Forecasters see the Russian economy contracting slightly in 2016. Recent economic forecasts, with the exception of the brighter projection of Russia’s economy ministry, see GDP contracting about a half per cent. A couple of forecasts expect a drop of about 1 %. The average price of oil next year is assumed to average $50–55 a barrel.

Most forecasts also see imports declining a bit further. Almost all forecasts see private consumption shrinking next year, most by about 1 %.

The CBR’s forecast update this month, however, reduced its earlier projection and now expects private consumption to contract by nearly 4 %. The consumption projections reflect the anticipation that household income growth will not keep up with inflation, especially as increases of public sector wages and pensions have been set very low due to the frail condition of government budgets.

The forecasts also see fixed investment slipping further by roughly 1 %. Estimates of the volume of Russian exports vary more widely, but forecasters generally expect exports to rise slightly in 2016.”

My view on Russian economic growth prospects for 2016 were reflected in my column for Slon.ru: http://trueeconomics.blogspot.ie/2015/12/151215-russian-outlook-for-2016-slon.html.

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...

13/7/15: IMF's Russian Economy Forecasts 2015-2016

IMF WEO update covered, briefly, changes to the Fund outlook for the Russian economy. Here's a summary:

Overall, the only point here is the delayed upgrade to Russian forecast for 2015-2016. Lower rate of contraction forecast for 2015 (from -3.833% in April WEO to -3.4% this time around) and return to (basically zero) growth in 2016 (+0.2% forecast in july compared to -1.096% in April).

In its briefing on the WEO update, IMF said (emphasis mine): "The other country where the numbers are very bad is in Russia. We now forecast Russia’s growth to be negative at -3.4 percent. It’s a bit better than the forecast in April. That comes from a small improvement in commodity prices and a small increase in confidence, but that’s clearly a very large negative number that will lead to a very tough year in Russia."

Additional risk factor, noted by the IMF, is rates reversion in the U.S. and closing on the rate reversion cycle re-start in the euro area: "...this is going to be the year in which the interest rate in the U.S. is going to start increasing. The date by which the interest rate is expected to increase in Europe will also get closer, and so you are going to see tighter financial conditions, which means that capital will tend to go back to where the rates are attractive. So far, it hasn’t been happening on a very large scale. I think we can expect some capital outflows from a number of these countries, and these always create some problems but they can handle, but that is a challenge they are going to have to face."

Just how bad the effect of rates reversion will be is hard to tell. Overall, however, Russian economy has suffered quite significantly from both, the adverse changes in the global credit flows (away from emerging markets in general) and idiosyncratic drivers pushing credit supply lower. Here are two charts covering the latest BIS data we have:

Overall credit:

Credit to non-financial private sector:

And sources of funding:

Source for charts above: http://www.imf.org/external/np/pp/eng/2015/062915.pdf

16/6/15: Russian Economy in a Chart: It's Structural...

Russian's economy problem is not crises-linked volatility. Instead, it is structural:

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.

1/5/15: Russian Economy: Latest Forecasts and Debates

Russian economy has been surprising to the upside in recent months, although that assessment is conditioned heavily by the fact that 'upside' really means lower rate (than expected) of economic decline and stabilised oil prices at above USD55 pb threshold. On the former front, 1Q 2015 decline in real GDP is now estimated at 2.2% y/y - well below -3% official forecast (reiterated as recently as on April 1) and -2.8% contraction forecast just last week, and -4.05% consensus forecast for FY 2015. It is worth noting that contraction in GDP did accelerate between February (-1.2% y/y) and March (-3.4% y/y). 2Q 2015 forecast remains at -3%.

In line with this, there have been some optimistic revisions to the official forecasts. Russian economy ministry has produced yet another (fourth in just two months) forecast with expected GDP decline of 2.8% this year. Crucially, even 2.8% decline forecast figure still assumes oil price of USD50 pb. Similarly, the Economy Ministry latest forecast for 2016 continues to assume oil at USD60 pb, but now estimates 2016 GDP growth at +2.3%

These are central estimates absent added stimulus. In recent weeks, Russian Government has been working on estimating possible impact of using up to 80% of the National Welfare Fund reserves to boost domestic infrastructure investment. This is expected to form the 3 year action plan to support economic growth that is expected to raise domestic investment to 22-24% of GDP by 2020 from current 18%. The objective is to push Russian growth toward 3.5-4% mark by 2018, while increasing reliance on private enterprise investment and entrepreneurship to drive this growth.

An in line with this (investment) objective, the CBR cut its key rate this week by 150bps to 12.5%. My expectation is that we will see rates at around 10%-10.5% before the end of 2015. From CBR's statement: "According to Bank of Russia estimates, as of 27 April, annual consumer price growth rate stood at 16.5%. High rates of annual inflation are conditioned primarily by short-term factors: ruble depreciation in late 2014 — January 2015 and external trade restrictions. Meanwhile, monthly consumer price growth is estimated to have declined on the average to 1.0% in March-April from 3.1% in January-February, and annual inflation tends to stabilise. Lower consumer demand amid contracting real income and ruble appreciation in the recent months curbed prices. Inflation expectations of the population decreased against this backdrop. Current monetary conditions also facilitate the slowdown in consumer price growth. Money supply (M2) growth rate remains low. Lending and deposit rates are adjusted downwards under the influence of previous Bank of Russia decisions to reduce the key rate. However, they remain high, on the one hand, contributing to attractiveness of ruble savings, and, on the other hand, alongside with tighter borrower and collateral requirements, resulting in lower annual lending growth."

There is an interesting discussion about the ongoing strengthening in Russian economic outlook here: https://fortune.com/2015/04/29/russia-economy-resilience/. Here's an interesting point: "Russian-born investment banker Ruben Vardanyan pointed out that the collapse of the ruble left much of the economy untouched, with roughly 90% of the population not inclined to buy imported goods. And that population, Vardanyan points out, has only increased its support for Vladimir Putin in the months following the imposition of sanctions." I am not so sure about 90% not inclined to buy imports, but one thing Vardanyan is right about is that imports substitution is growing and this has brought some good news for producers in the short run, whilst supporting the case for raising investment in the medium term.


Meanwhile, The Economist does a reality check on bullish view of the Russian economy: http://www.economist.com/news/finance-and-economics/21650188-dont-mistake-stronger-rouble-russian-economic-recovery-worst-yet.

The Economist is right on some points, but, sadly, they miss a major one when they are talking about the pressures from USD100bn of external debt maturing in 2015.

Here is why.

Russia's public and private sector foreign debt that will mature in the rest of this year (see details here: http://trueeconomics.blogspot.ie/2015/04/14415-russian-external-debt-redemptions.html) does not really amount to USD 100bn.

Foreign currency-denominated debt maturing in May-December 2015 amounts to USD68.8 billion and the balance to the USD100bn is Ruble-denominated debt which represents no significant challenge in funding. Of the USD68.8 billion of foreign exchange debt maturing, only USD2.01 billion is Government debt. Do note - USD611 million of this is old USSR-time debt.

Corporate liabilities maturing in May-December 2015 amounts to USD45.43 billion. Of which USD12.46 billion are liabilities to direct investors and can be easily rolled over. Some USD963 million of the remainder is various trade credits and leases. Also, should the crunch come back, extendable and cross-referenced. Which leaves USD32.07 billion of corporate debt redeemable. Some 20% of the total corporate debt is inter-company debt, which means that - roughly-speaking - the real corporate debt that will have to be rolled over or redeemed in the remaining months of 2015 is around USD26-27 billion. Add to this that Russian companies have been able to roll over debt in the markets recently and there is an ongoing mini-boom in Russian corporate debt and equity, and one can be pretty much certain that the overall net burden on foreign exchange reserves from maturing corporate debt is going to be manageable.

The balance of debt maturing in May-December 2015 involves banks liabilities. All are loans and deposits (except for demand deposits) including debt liabilities to direct investors and to direct investment enterprises. Which means that around 25-33% of the total banks liabilities USD26.57 billion maturing is cross-referenced to group-related debts and investor-related liabilities. Again, should a crunch come, these can be rolled over internally. The balance of USD19.9 billion will have to be funded.

So let's take in the panic USD100 billion of foreign debt claimed to be still maturing in 2015 and recognise that less than USD50 billion of that is likely to be a potential (and I stress, potential) drain on Russian foreign exchange reserves. All of a sudden, panicked references in the likes of The Economist become much less panicked.

Meanwhile, Russian economy continues to post current account surpluses, and as imports continue to shrink, Russian producers' margins are getting stronger just as their balance sheets get healthier (due to some debt redemptions). It's a tough process - deleveraging the economy against adverse headwinds - but it is hardly a calamity. And The Economist, were it to shed its usual anti-Russian biases, would know as much.

That said, significant risks remain, which means that a prudent view of the Russian economy should be somewhere between The Economist's scare crow and the Fortune's and the Economy Ministry's cheerleading. Shall we say to expect, on foot of current data and outlook, the 2015 GDP growth to come in at -3.5-4%, with 2016 economic growth to come in at +1.5-2%?

26/3/15: BOFIT Latest Forecasts for Russian Economy 2015-2017

BOFIT published their new forecasts for the Russian economy. Here is the summary with my comments:

Pre-conditions: "Russian economic growth has slowed for three years in a row, due to e.g. waning growth in the available labour force, capital and productivity. In addition, a slight decline in export prices, the Ukraine crisis, sanctions, Russia’s counter-sanctions and other negative measures, with the accompanying increase in uncertainty, slowed Russian GDP growth to just over 0.5% in 2014. ...The impact [of oil price drop in H2 2014] began to show in the early months of 2015, with a slight contraction in GDP. Without transient factors, the economy would already have contracted in 2014."

What transient factors supported growth in 2014?

• "As in 2013, industrial production was partly supported by strong growth in defence spending."
• "The depreciation in the real exchange rate of the rouble since the early months of 2013 has [created room for some industrial imports substitution], and may also have slightly boosted exports of certain non-energy basic commodities."
• "The rouble’s strong depreciation led to consumer spending rushes, which kept private consumption growth at some 2%. However, wage growth slowed, as did pension growth. Inflation rocketed (to almost 17% in February) on the back of rouble depreciation and Russia’s counter-sanctions in the form of restrictions on food imports. Consequently, real household incomes contracted in annual terms for the first time since 1999. Aggregate income was underpinned by employment, which remained buoyant for the time being. Household borrowing decreased further."
• "Steered by the government, investment by most large state enterprises was relatively high. This was, however, insufficient to prevent total investment from falling by some 2%. The net capital outflows of the corporate sector increased, due partly to repayment of foreign debt and considerable constraints in access to foreign funding as a result of domestic uncertainties and external financial sanctions."

External position forward: "Export volumes declined by 2%. Exports of crude oil and gas dwindled markedly, while exports of petroleum products continued to grow at a robust pace. As the fall in ex-port prices steepened, export income in the last months of 2014 was already well over 10% lower (in euro terms) than a year earlier. Import volumes declined by 7% in 2014 and have now been in decline for 1½ years. The decline steepened considerably towards the end of the year."

BOFIT forecasts for 2015 assume oil price at USD55 pb and above and sanctions and counter-sanctions to remain in place "unchanged for a relatively long period".

"The impact of [oil price] change will be profound, since energy exports ac-count for almost a fifth of Russia’s GDP."

Do note: energy exports include not just crude petroleum and natural gas, but also refined products and electricity (including nuclear). This puts the Russian economy into perspective not usually considered in the Western media - the economy is much more diversified than many believe and claim. Further note, energy (total energy, not just oil and gas) accounts for just over 60% of total exports income.

Outlook summary: "...Russian GDP will contract by over 4% in 2015. The high degree of uncertainty will cause a shrinkage in private investment, while private consumption will be cut particularly by rapid inflation. Even though Russian imports have already edged down, they are estimated to fall further, by one fifth, in response to the sharp depreciation of the rouble during the last months of 2014. In 2016–2017, global economic growth and world trade will pick up, and it is assumed the oil price will rise to around USD 65 a barrel. The Russian economy is expected to continue slightly downward, before a slow recovery in 2017. The drop in investment is expected to flatten out towards the end of the forecast period. With real household income remaining low, it will also take time for private consumption to recover. Export volumes will grow at a very subdued pace. Imports will recover after 2016."

All in-line with my own outlook.

Private consumption "…will decrease substantially in 2015, and slightly further in 2016" driven primarily by inflation eroding household incomes and weak prospects for growth in private sector wages in nominal terms and public sector wages expansion below the rate of inflation. Notably, "the government is also seeking to cut the number of public sector employees." BOFIT expects pensions to "barely keep pace with inflation, at best".

Household credit will remain subdued, "even though the debt-servicing burdens stemming from payback of short-term loans will ease gradually. As during the crisis of 2009, savings may be rather substantial."

Public consumption "will decline amid pressures on the central government finances."

Investment "…will dwindle substantially this year and next. Private investment, in particular, will be depressed by a number of uncertainties relating to the ongoing tensions in East Ukraine, uncertain prospects for sanctions and the unpredictability of Russian economic and trade-related measures stemming from possible additional sanctions and recession countermeasures." So no surprises, then.

Fiscal side: "…the federal budget deficit is set to grow so large in 2015 (to about 3.5% of GDP) that the government Reserve Fund may be eroded by as much as a half. It is possible that support measures will be implemented using government bonds (as in the bank support operations in December 2014, which amounted to 1.4% of GDP). The support operations can also draw on debtors’ bonds (as in the funding of the state-owned oil giant Rosneft, which was just under 1% of GDP)."

The longer-term outlook is deteriorating: "The foundations of growth are being eroded by the contraction in private investment. Government spending is focused increasingly on defence and pensions, while public investment is subject to the largest cuts."

Chart below summarises forecasts:

Sources: Rosstat, BOFIT Forecast for Russia 2015–2017

16/3/2015: Some new 2015-2018 forecasts for the Russian Economy

Amidst much of the (occasionally informed) speculation as to the whereabouts of Russian President Putin (see for example this rather informative piece: http://uk.businessinsider.com/what-is-putin-doing-2015-3?r=US#ixzz3UWqOOHLc), President Putin has finally reappeared from wherever he might have been over the last how-many days... Of course, his reappearance promptly led to some 'highly informed' Western analysts seeing President Putin's double...

The matters of conspiracy aside (for their endless supply makes their value trend toward absolute zero pretty fast), the Economy Ministry has been busy preparing new forecasts for Russia for 2016, trailing behind the recent forecasts from the Central Bank.

Minister Ulyukaev today said that the economic outlook for Russia is based on the view that Western sanctions will remain in place "at least over the period of 2015-2016" and "most likely, in the following years". Beyond this, the Minister said that 2016-2018 will likely see 2.5%-3% average rate of growth in real GDP and that 2016 growth is likely to be in the same range. New forecasts, according to Mr. Ukyukaev - currently in preparation stages - see economic recovery starting in 2016. This, if confirmed in the official forecasts, would represent a dose of optimism not matched by many independent analysts, and well in excess of the cautious gloom of the Central Bank (see below).

Meanwhile, as The Moscow Times (not a paper known for expressing pro-Kremlin sentiments) noted: foreign investors are heading back into Russian markets http://www.themoscowtimes.com/article/517481.html. I wish them well - they are in for a rough ride, but should enjoy some upside, on average. Do note some of the risks and concerns voiced at the end of the article.

Of course, amidst all this positivity, the real signs are pointing to growing concerns about the state of the economy.

Central Bank published forecasts show "at risk scenario" forecast of -5.8% contraction in GDP in 2015. This assumes average oil prices in the range of USD40-45pb.

Under the base scenario, oil prices are expected to average USD50-55pb in 2015, rising to USD60-65pb in 2016 and USD70-75pb in 2017. These assumptions support GDP growth forecast of -3.4% to -4.0% in 2015, followed by a contraction of -1.0% to -1.6% in 2016, and growth of 5.5% to 6.3% in 2017. In effect, these forecasts imply 2015-2017 growth of between 0.4% and 0.9%, cumulative. Under the base scenario, growth of 4.6% in 2017 would be required to get Russian economy back to the end-2014 levels.

The CBR forecasts decline of USD50 billion in its forex reserves to around USD307 billion in 2015 and no change in reserves in 2016. The balancing out of reserves is based on current account surplus forecast of USD90 billion in 2016 up on USD64 billion in 2015. CBR projects current account surplus of USD119 billion in 2017.

My view is that the above figures err on optimistic side. I expect Russian economy to shrink by around 4-5% in 2015, post GDP growth of between -1.5% to +0.5% in 2016 and grow by around 3% in 2017. I also expect CBR forex reserves to drop by around USD80 billion in 2015 and closer to USD40-50 billion in 2016 to USD225-230 billion at the end of 2017.



Note: a fascinating and exhaustingly detailed account of the short history of Russian Government and business struggles for who will be building the bridge to Crimea: http://www.forbes.ru/print/node/282637 (in Russian).

16/1/2015: Moody's expect Russian GDP growth of -5.5% in 2015

Moody’s Investors Service, expects Russian GDP to post a decline of 5.5 percent in 2015.

The forecast comes via Moody's note on Armenia in which the agency downgraded Armenian debt to Ba3 from Ba2 and cut outlook from stable to negative.

Per Moody's: "The key drivers for the downgrade are the following:

1) Armenia's increased external vulnerability due to declining remittances from Russia, an uncertain outlook for foreign direct investment (FDI), an elevated susceptibility to exchange rate volatility, and expected pressure on foreign exchange (FX) reserves;

2) The country's impaired growth outlook, compounded by negative growth spillovers from Russia, weak investment activity, and constraints on trade with countries outside the Eurasian Economic Union (EEU) that are expected from Armenia's recent EEU accession."

Moody's note: https://www.moodys.com/research/Moodys-downgrades-Armenias-government-bond-rating-to-Ba3-from-Ba2--PR_316326

According to Moody's "Remittances represent about 15% of GDP, with over 90% of the total stemming from Russia."

More on the remittances from Russia to other CIS and former USSR states here: http://trueeconomics.blogspot.ie/2015/01/1312015-remittances-from-russia-big.html

29/3/2014: Almost Armageddon? WorldBank Forecasts for Russian Economy

This week World Bank published their outlook for Russian economy. Here are two core forecast scenarios:

High-risk:

Low-risk:

And a summary of the Government fiscal policy framework, covering adopted budgetary targets:

Key takeaways:

1. Ugly 2014 one way or the other (high and low risk scenarios)
2. Ugly non-oil balances on Government side
3. More conservative budgetary basis (oil price) than media allows
4. Highly conservative deficit targets despite economic growth slowdown (should EU want to find a fiscally responsible neighbour to match own 'austerian' ethos - Russia is a good candidate)
5. Gross capital formation is ugly and showing no sign of uplift on investment side which offers policy room for supporting some growth momentum
6. Capital account is assumed to be really, really ugly in high risk scenario (USD133 billion outflows) which is likely to trigger capital controls should things deteriorate this much

Russia comparative to the rest of the world:

It does look like 2014-2015 are being set (in World Bank view) as trend-breaking years for Russia

Note: Capital outflows tracing back few years:

23/1/2014: Remember that 'upbeat' IMF Growth Outlook?..

A quick note on the IMF update to the World Economic Outlook, released earlier this week. Here are some charts showing core forecasts progressions for growth and other global economy's performance metrics, with brief comments from myself.

The core point in the below is where does one exactly find the 'good news' relating to the IMF upgrading growth conditions expectations? The answer is that, contrary to media reports, the upgrades evaporate when once compares January 2013 forecasts against January 2014 ones, although there are some improvements in comparative for October 2013 against January 2014 forecasts. Materially, however, the upgrades are minor.

First for Advanced Economies:

The above chart shows evolution of real GDP growth for 2013 from the most recent forecast (January 2013) to the latest estimate (January 2014). The notable feature of this is the deterioration in underlying economic conditions over 2013, with forecast from January 2013 overestimating expected outrun for Global Economy growth and for all major advanced economies, save Spain, Japan and the UK. In case of Spain, forecast and outrun differ in terms of shallower expected decline in real GDP now expected for Spanish economy, compared to January 2013 forecast. In the case of Japan and the UK, the difference in higher estimated growth rates compared to forecast.

Moving on to 2014 forecasts for real GDP growth:

Much has been said in the media on foot of the IMF upgrade of its forecasts for global growth for 2014. This analysis is solely based on the comparing IMF outlook published in October 2013 against the forecast published this month. However, looking at January 2013 forecast against January 2014 forecast shows that the IMF outlook for the global economy has deteriorated since a year ago, from 2014 real GDP growth forecast of 4.1% to 3.7%. The same applies to all major advanced economies, save Germany, Italy, Japan and the UK.

Another important note here is that in the case of Italy and Germany, the difference between January 2013 and January 2014 forecasts is well within the margin of error. And that for the Advanced Economies as a whole, the forecast between two dates has not moved at all.

Thus, overall, the news analysis of 'greater optimism' from the IMF with respect to growth is really unwarranted - there is very little significant change to the upside in the IMF latest outlook.

Things are a little better for 2015 outlook:

However, we only have two points for comparing these forecasts: October 2013 and January 2014, so the above analysis (12 months span between forecasts) is not really available. Nonetheless, there is a significant marking up of global growth expectations between two forecast dates (from 2.9% to 3.9%), and  small downgrade in Advanced Economies growth forecast from 2.5% to 2.3%.

In addition, only Spain and the UK received a significant (statistically) growth upgrade, with the Euro area, Germany and Italy upgrades being within the margin of error.

The matters are actually far worse for the Emerging and Developing economies. 2014 forecasts are shown below:

With exception of Sub-Saharan Africa, all other major emerging and developing economies and regions have been downgraded in January 2014 forecast compared to January 2013 forecast.

When it comes to 2015 forecasts: there are more upgrades to growth forecasts:

But none - save for Developing Asia, China and MENA - are within statistically meaningful range.

The really devastating - the thesis of 'improved IMF outlook' - evidence comes from looking at the IMF forecast for Global Growth (controlling for FX rates):

Summary of the above chart is simple and ugly:

• Lower growth estimates for 2013
• Lower growth forecast in 2014, compared to the forecast published a year ago
• Lower growth forecast in 2015

And now, recall the 'salvation by trade' argument for Europe and Ireland? The 'exports-led recovery' story? Here are IMF latest forecasts for global trade volumes growth, and for imports by the advanced economies (AE) and emerging and developing markets (EM & developing):

Summary of the above chart is also simple and ugly:

• Lower trade growth in 2014 and 2015
• Lower imports growth in Advanced Economies in 2014 and 2015
• Lower imports growth in EMs in 2014 and 2015

So basic question is: Who will be buying all the exports that are supposed to grow across all European states?.. Martians?

22/1/2014: Russia and the Middle-Income Trap

Is Russia exhausting sources for economic growth?

A very important article from Andres Aslund http://www.themoscowtimes.com/opinion/article/russia-is-losing-sources-of-economic-growth/493094.html

The idea of the 'middle income trap' is covered here:  http://www.imf.org/external/pubs/ft/wp/2013/wp1371.pdf

The original research (revised to January 2013) is here: http://www.nber.org/papers/w18673 and non-technical exposition: http://www.voxeu.org/article/growth-slowdowns-redux-avoiding-middle-income-trap and here: http://www.voxeu.org/article/avoiding-middle-income-growth-traps

16/12/2013: Russian economy & Ireland-Russia Trade updates

My most recent note on Russian economy is available here: http://irba.ie/2013/12/03/russian-economy-a-slowdown-before-policy-driven-re-acceleration/#more-1245

On Russian inflation: as noted in the above, inflation accelerated in October. This is the first month of re-acceleration since May 2013 when inflation peaked at 7.4% y/y. The cycle low inflation was recorded in September at 6.1% y/y.

Ireland's bilateral trade (goods only) with Russia is covered here: http://irba.ie/2013/12/03/trade-with-russia/

9/8/2013: Euromoney on Russian Economy's Risks

Deteriorating outlook for Russia and CIS is reflected in this Euromoney Country Risk note, citing my views on Russian economy's risks:

http://www.euromoney.com/Article/3230133/SubPage/9449/ChannelPage/0/Region/14091/Russia-and-CIS-satellites-failing-to-impressECR-Q2-2013-results.html

13/5/2012: Russian Economy forecasts H2 2012

Quick set of slides on Russian Economy forecasts for 2012: