After showing rather strong resilience to the pandemic and the collapse of international oil prices in 2020, the Russian economy rebounded strongly in 2021. Yet two major risks are currently threatening growth: inflation and a tightening of international sanctions. These sanctions could even add to the inflationary risk. Nonetheless, the government has the financial capacity to support the economy, with solid public finances and low refinancing risks. Moreover, even if international sanctions were tightened to the point that foreign investors were denied access to Russia’s secondary debt market, the government would still be able to finance itself on the domestic market.
The Ukrainian economy has suffered an accumulation of external and domestic shocks: the pandemic (vaccination rates are still low), the ongoing geopolitical risk, and domestic political tensions. Adding to these factors, inflation has accelerated over the past year. However, the Covid-19 crisis has been much better absorbed than was the case for the crises of 2008 and 2014. The current account balance has recovered and foreign currency reserves have increased, thanks in particular to higher commodity prices (cereals and metals). International support (mainly from the IMF and European Union) provided the required complement, allowing fiscal support to the economy. However, the country remains exposed to a sudden stop of capital flows
After a modest contraction in 2020, the Russian economy has registered a solid growth rebound since March 2021 driven by the strength of domestic demand and exports. The third wave of the epidemic seen since June, alongside strong inflationary pressure and the resulting tightening of monetary policy, could, however, hold back the recovery. This said, the threats to the economy remain under control. Public finances have been boosted by a sharp rise in global oil prices and the debt refinancing risk is limited despite the latest US sanctions. Lastly, foreign exchange reserves cover the totality of external debt.
The country weathered the difficulties of 2020 relatively well, notwithstanding the recession that Covid-19 produced and the drying up of private capital inflows. Thanks to the improvement in the terms of trade, the current account surplus was sufficient to balance the existing gap. Over recent years, Ukraine has been able to improve its fiscal management, which helped to secure the support of international financial institutions. The challenge for the months ahead lies in a resumption of capital inflows and in the planned reforms to encourage investment and increase potential growth. It will be important to keep an eye on reforms in the banking sector, which relate both to the consolidation of the sector and to the improvement of the prudential and supervisory framework.
The scenario of a partial and still fragile economic recovery is confirmed against a backdrop of a spreading pandemic at end-2020. Household consumption is the only component that managed to contribute to growth, but it could run out of steam with the upsurge in inflation. The recovery is expected to broaden in 2021, thanks to the expected resumption of production in the extractive industries, higher oil prices and the improvement in business confidence in the manufacturing sector. Yet monetary and fiscal supports will be relatively small. Public finances have been fairly resilient, and foreign reserves have consolidated despite capital outflows, since the rouble served as the adjustment variable
After contracting 8% year-on-year (y/y) in Q2 2020, Russian economic growth is struggling to recover. In August, monthly GDP was still down 4.3% y/y. Household confidence and the business climate are both morose, and activity has barely rebounded. Adjusted for seasonal variations, industrial output was still 7% lower in August than the year-end 2019 level, even though oil production was increased as of 1 August as part of OPEC agreements. According to survey data, we should not expect to see a significant rebound in September either (PMI in manufacturing dropped below the 50 threshold separating expansion from contraction). Corporate investment continues to slump, as illustrated by the contraction in capital goods imports, and is still 5% below the 2019 average
The Russian economy is more solid today than it was five years ago. After the 2014-15 crisis, the government managed to rebuild its sovereign wealth fund, which is now enabling it to offset the loss of oil revenue. Public finances are less dependent on oil revenues, thanks to the VAT increase in 2019, and the government should have no trouble meeting its short-term commitments. Yet lockdown restrictions and the collapse of commodity prices will have a big impact on both growth and the banking sector, which is still fragile, although it is less vulnerable to a forex shock.
Ukraine is usually quite prone to boom bust cycles. Yet high volatility has not allowed to stabilize growth towards a higher level, and fickle capital inflows have reinforced the importance of funding from foreign institutions, notably from the IMF and the European Union. Such official financing, coupled with the structural progress it has made in recent years, seem to have helped the country to cope with the Covid-19 crisis, at least for the moment, with fewer negative financial consequences than initially feared. Strong foreign demand for Ukraine’s grain, lower oil prices and the foreign financing are all favourable factors that have helped the country weather the crisis, and raise hopes for a rapid economic recovery once the Covid-19 crisis is over.
The Covid-19 crisis will not be without its consequences for the Russian economy, which faces twin supply and demand side shocks against the background of collapsing commodity prices. According to forecasts from the IMF and the Russian central bank, economic activity could contract by between 4% and 6%. Macroeconomic fundamentals are likely to worsen, but without undermining the government’s ability to meet its obligations. However, this latest shock will weaken a banking sector that is in full restructuring mode and could delay the important government development projects that will be essential to boosting growth over the medium term. Against this background, on 2 June the government announced a new plan of RUB 5 trn (4
In 2019, despite weak growth and a drop in oil revenues, Russia’s macroeconomic fundamentals remained sound. This said, growth prospects remain weak despite disinflation and a relaxation of monetary policy. Standards of living are still low and the poverty rate has increased. The main threat to economic growth is a tightening of sanctions, even though the sharp increase in foreign exchange reserves, the rebuilding of the national wealth fund and the significant reduction in external debt are all factors that reduce the country’s dollar financing requirement. A toughening of sanctions could hit foreign direct investment, which has fallen sharply over the last five years.
Ukrainian growth accelerated rapidly in the first nine months of 2019, driven notably by the agricultural sector and household consumption, the latter being largely stimulated by borrowing. The appreciation of the hryvnia (UAH) triggered a sharp drop in inflation, which facilitated greater monetary policy easing. In the short term, monetary policy support should offset the impact of the global economic slowdown, which has already eroded industrial activity. At the same time, the announcement of a new IMF agreement is bound to reassure foreign investors. The central bank will have to deal with a classic dilemma: it needs to ease monetary policy to curb portfolio investment inflows, but doing so risks triggering a credit boom.
At its 25 October monetary policy meeting, Russia’s Central Bank cut its key policy rate by 50 basis points to 6.5%, the lowest level since 2014. This had been the fourth key rate cut since June. Monetary easing occurs at a time when inflationary pressures are declining (4% year-on-year in September) while economic activity remains sluggish. The Central Bank is now forecasting a growth of between only 0.8% and 1.3%, which is close to the growth forecasts of the IMF and World Bank (1.1% and 1%, respectively, vs. 2.3% in 2018). This slowdown can be attributed to the deceleration in both domestic and external demand
In August, the rating agency Fitch upgraded Russia’s sovereign rating based on its greater resilience to the external environment. The timing might seem surprising considering that Russian GDP growth slowed sharply in H1 2019 and the central bank had to revise its outlook for 2019-2021 downwards again. Even so, the consolidation of Russian fundamentals is undeniable. Currently the main sources of concern are the sharp increase in household lending and the delays in implementing public spending programmes, which should stimulate growth in the medium term.
Economic growth slowed sharply in the first 5 months of the year and the central bank has revised downward its forecasts. To boost activity, the monetary authorities lowered their key rates by 25bp in June at a time when inflationary pressures had eased slightly. The government also took major steps to stimulate the potential growth rate, which has declined constantly since 2008-09. Despite the increase in public spending, the government continued to generate a big fiscal surplus in the first 5 months of the year. Although these measures are a step in the right direction, they must be accompanied by the state’s disengagement from the economy and better corporate governance to generate a substantial increase in potential growth.
Economic growth slowed in the first months of 2019, and is now close to its potential growth rate of 1.5% according to the central bank. A 2-point VAT increase on 1 January has strained real wage growth and sapped household consumption. Inflation (5.2% year-on-year in February) is still below the central bank’s expectations, and the key policy rate was maintained at 7.75% following the March meeting of the monetary policy committee. In the first two months of 2019, investors were attracted by high yields on Russian government bonds, despite the risk of further tightening of US sanctions. The rouble also gained 5% against the US dollar in Q1 2019.
In 2018, Russia swung back into growth and a fiscal surplus, increased its current account surplus and created a defeasance structure to clean up the banking sector. The “new” Putin government affirmed its determination to boost the potential growth rate by raising the retirement age and launching a vast public spending programme for the next six years. Yet the economy faces increasing short-term risks. Monetary tightening and the 1 January VAT increase could hamper growth. There is also the risk of tighter US sanctions, which could place more downward pressure on the rouble.
