Perspectives

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EcoPerspectives // 1 quarter 2019  
economic-research.bnpparibas.com  
Russia  
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019: greater uncertainty  
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.  
GDP growth slows in Q3  
1- Croissance et inflation  
In Q3 2018, Russian GDP slowed to 1.5% year-on-year (y/y) from  
.9% the previous quarter. Growth averaged 1.6% in the first three  
GDP Growth (%)  
Inflation (%)  
1
7
.1  
Forecast  
Forecast  
quarters of 2018. Oil production rebounded by 5% thanks to a  
gradual increase in production quotas (+4% in the second half). In  
the agricultural sector, in contrast, activity contracted. Growth also  
slowed slightly in industry, but rose strongly in services. Leading  
indicators are still favourable for both the manufacturing and  
services sectors, but household consumption could be strained by  
the slowdown in employee purchasing power since August and the  
4.2  
3
.7  
3.6  
2
.8  
1
.8  
1.7  
1.6  
1.6  
1
January increase in the VAT rate, from 18% to 20%.  
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0.2  
Since the beginning of H2-2018, inflation has accelerated to 3.8%  
y/y in November, compared to an average of 2.3% in the first six  
months of the year. For the moment, inflation is still lower than the  
monetary authorities’ target of 4%. The upturn can be attributed to  
higher prices for food and non-food products as well as services.  
Three factors are driving inflation: unfavourable base effects (the  
1
6
17  
18  
19  
20  
16  
17  
18  
19  
20  
Source: National accounts, BNP Paribas  
2
- Economic slowdown in Q3-2018  
GDP (y/y) Household consumption (pp) Public expenditure (pp)  
2017 harvest was particularly abundant, which helped lower food  
 Investment (pp)  Net exports (pp)  Statistical errors (pp)  
prices), higher gasoline prices, which carried over to transport costs,  
and the rouble’s depreciation. From a 2-year horizon, growth  
prospects are still subdued and high risks loom over the economy.  
In December 2018, Russia agreed to reduce its oil output by  
10  
5
0
2
30,000 barrels a day (the equivalent of 2% of current production)  
starting in January 2019. The VAT hike and any second-round  
effects it might generate are likely to hamper domestic activity. So  
far, Russia’s central bank is estimating that price inflation could  
range between 5% and 5.5% in full-year 2019, before falling back to  
-
5
-
10  
4
% on average in 2020. Yet inflationary risk could be revised  
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15  
upwards if the US Congress decides to impose additional sanctions  
on Russia, which is likely to place more downward pressure on the  
rouble. To contain the risks of an inflationary spiral, the monetary  
authorities raised their key policy rate by 25 basis points to 7.75%  
last December and announced that further rate increases were now  
possible. Monetary policy tightening could strain investment, which  
has already begun to slow in the second quarter.  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
Source: CEIC  
policies that favour immigration) and to encourage the spread of  
technical advances.  
 Fiscal policy aims to stimulate growth  
In the longer term, the World Bank estimates that Russia’s potential  
growth rate will continue to erode from 1.5% in 2017 to 1.3% by  
Russia significantly consolidated its public finances in the first 11  
months of 2018, thanks to strong revenue growth and tight control  
over public spending. Yet the government temporarily abandoned its  
target of maintaining a primary balance over the next six fiscal years,  
and is now forecasting a primary deficit of 0.5% of GDP.  
2
022. Yet the institution esteems that this figure could be revised  
1
upwards to 3% if major reforms were implemented to increase the  
active population (by raising the retirement age and adopting  
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Russia, Economic Report, November 2018  
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22  
EcoPerspectives // 1 quarter 2019  
economic-research.bnpparibas.com  
The government has pledged to increase structural spending to  
stimulate growth. This “budget overrun” should nonetheless be  
limited.  
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- The rouble has been disconnected from oil prices since 2017  
Oil prices (USD, LHS)  
▪▪ RUB/USD exchange rate (inversed RHS)  
In the first 11 months of 2018, the federal government reported a  
fiscal surplus of 3.7% of GDP, compared to a deficit of 0.7% of GDP  
in the year-earlier period. The deficit excluding oil and gas revenues  
was trimmed to 4.9% of GDP, 1 point less than in 2017, thanks to  
the decline in the public spending to GDP ratio. The government  
and administrations reported a primary surplus of more than 3% in  
the first 10 months of the year.  
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40  
0
1
2
3
4
5
6
7
8
0
0
0
0
0
0
0
0
120  
100  
8
6
4
0
0
0
The consolidation of public finances in 2018 should result in a  
reduction in the public debt to GDP ratio. With the increase in public  
spending as of 2019, this ratio is expected to rise steadily over the  
next six years.  
20  
0
90  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
Source: CEIC  
In May 2018, the government announced several measures to  
reverse the country’s demographic dynamics, raise potential GDP,  
reduce poverty and extend life expectancy by 2024. To achieve this,  
the finance minister pledged to increase spending in numerous  
areas, including education, healthcare, infrastructure and support for  
SME. The cost of these measures was estimated at 1.1% of GDP  
per year over the next six years. The government plans to finance  
these measures in part by increasing the VAT rate (which will  
increase revenues by 0.5 to 0.6 points of GDP each year) and by  
streamlining oil sector taxation by 2024. The remainder will be  
financed by bonds issued in the domestic market. The increase in  
public debt is nonetheless expected to be limited to 5 points of GDP.  
increase in the household debt burden. The ratio of household debt  
to revenue is on the rise since lending has increased faster than  
household revenue growth, but it is still very moderate at about 25%.  
To date, there has not been an increase in late payments on  
consumer credit or mortgage loans. To contain the risk, however,  
and to encourage banks to reduce their exposure to households, the  
central bank took measures in May and September 2018 to boost  
the weighting of consumer credit and mortgage loans (for those with  
small instalments) in the calculation of risk-weighted assets. At the  
end of October 2018, the banks had satisfactory capital adequacy  
ratios, with CAR and Tier 1 CAR of 12.4% and 9.5%, respectively, in  
October 2018.  
The banking sector is still fragile  
The banking sector is still fragile due to its exposure to both credit  
risk and interest rate risk. Yet several factors should favour its  
consolidation, including government support, improved  
macroeconomic fundamentals and recent measures taken by the  
monetary authorities.  
Greater interest rate risk is another source of concern. According to  
the central bank, the banks’ exposure to interest rate risk has  
increased due to the growing mismatch in maturities between long-  
term assets and short-term liabilities. In October 2018, assets  
maturing in less than 1 year covered only 61% of liabilities of less  
than 1 year (vs 63% in January 2018).  
Over the past 12 months, the quality of bank assets has not  
improved even though companies are in a healthier financial  
situation since the rebound in economic activity (corporate loans  
account for 70% of all bank loans). According to the IMF, the share  
of doubtful loans in the banking sector as a whole has remained  
virtually flat at 10.7% in Q3 2018, compared to 10.2% at year-end  
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017. In contrast, the share of lost or very doubtful loans continued  
to rise according to the Central Bank of Russia, to 11.9% in October,  
from 10.5% at year-end 2017. The most fragile business sectors are  
construction and real estate, where the share of non-performing  
loans continued to rise over the past 12 months. Companies with  
foreign currency debt are likely to see their situation deteriorate  
even further with the rouble’s depreciation.  
The strong acceleration in household lending over the past 12  
months could also become a source of concern. Household lending  
rose 22.5% y/y in October (up from 10.7% a year earlier). So far, the  
decline in interest rates on household loans maturing in more than a  
year (down 165 bp in a year) have helped partially contain the  
2
Categories IV and V. These statistics integrate the bad loans that were held by the  
state-owned banks recapitalised in 2017: Promsvyazbank, Otkritie, B&N.  
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