Emerging

Economic growth faces headwinds

EcoEmerging// 2nd quarter 2019  
10  
economic-research.bnpparibas.com  
Russia  
Economic growth faces headwinds  
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.  
Growth acceleration in 2018 is not what it seems  
1- Forecasts  
Economic growth accelerated to 2.3% in full-year 2018 from 1.6% in  
017. Yet this strong performance must be kept in perspective. The  
acceleration can be attributed primarily to a slowdown in imports,  
which reflects slowing investment as well as household  
consumption, albeit to a more limited extent. As a result, net exports  
2
017 2018e 2019e 2020e  
2
Real GDP growth (%)  
1.6  
3.7  
2.3  
1.5  
1.7  
Inflation (CPI, year average, %)  
Central Gov. balance / GDP (%)  
Public debt / GDP (%)  
2.9  
2.6  
5.1  
0.9  
4.1  
0.5  
-1.5  
made  
a
very positive contribution to growth in 2018  
15.5  
2.1  
14.0  
7.0  
14.8  
4.5  
15.1  
4.0  
(
+0.8 percentage points) after a negative contribution in 2017. All  
Current account balance / GDP (%)  
External debt / GDP (%)  
other growth components slowed. The slowdown in investment  
growth (+0.2% y/y in Q4 2018 vs +4.5% in the first three quarters)  
was partially due to less favourable monetary conditions. Corporate  
lending rates rose slightly (+60 basis points) as monetary policy was  
tightened.  
32.8  
347  
27.4  
375  
26.6  
418  
23.8  
435  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDRUB (year end)  
10.3  
58.3  
12.8  
69.4  
12.9  
71.0  
13.0  
70.0  
e: estimates and forecasts BNP Paribas Group Economic Research  
Faced, on the one hand, with downward pressure on the rouble due  
to the risk of tighter US sanctions and, on the other hand, with  
higher inflation expectations following the VAT increase on  
2
- Inflation (year-on-year, %)  
Consumer prices ▪▪▪ Food prices  
1
January 2019, the Central Bank of Russia raised its key policy  
rate by 25 basis points on two occasions, in September and  
December 2018, to 7.75%.  
Core inflation (excluding food and energy prices)  
25  
25  
Economic growth is expected to slow in 2019. In the first two  
months of the year, economic indicators point to slowing growth.  
Industrial output slowed to 2.3% in the first two months of the year  
from 2.7% in Q4 2018, according to central bank estimates. It is  
nonetheless resilient thanks to the increase in natural gas and metal  
output. In contrast, oil production continued to slow in compliance  
with OPEC agreements.  
20  
20  
15  
10  
5
1
5
0
5
0
5
1
0
Production of capital goods and consumer goods (excluding food  
products) slowed in keeping with a net slowdown in retail sales and  
the drop-off in automobile sales. The slowdown in household  
consumption is mainly due to the 2-point increase in VAT, which has  
strained real wage growth (+0.7% year-on-year in February 2019,  
compared to a 2018 average of +7%).  
-
-5  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
Source: CBR  
(
notably for food prices). In December 2018, prices were up 4.3%  
year-on-year, compared to only 2.5% y/y in the year-earlier period.  
All products (food and non-food) were hit by this acceleration. Since  
the end of the year, price increases have accelerated  
+1.2 percentage points to 5.2% year-on-year in February) due to  
the VAT increase, which accounted for nearly half of the recent  
price acceleration according to the central bank.  
Even so, confidence indicators in industry are still looking upbeat.  
Survey results suggest that domestic orders accelerated in March  
while export orders continued to sag. According to the Central Bank  
of Russia, economic growth is now close to its long-term potential  
rate of 1.5%.  
(
Inflationary pressure rises  
Non-resident investors return in first part of the year  
Consumer prices began to accelerate as of July, reflecting the  
rouble’s depreciation, price increases for certain commodities  
In 2018, the current account surplus swelled to 6.9% of GDP, up  
from 2.1% of GDP in 2017. Buoyed by increases in international oil  
and gas prices, the trade surplus rose 4.5 points to 11.8% of GDP.  
(
agricultural products and oil) and an unfavourable base effect  
EcoEmerging// 2nd quarter 2019  
11  
economic-research.bnpparibas.com  
At the same time, imports declined slightly (-0.1% of GDP). The  
current account surplus covered the financial account deficit, which  
amounted to about 5% of GDP.  
3
- Balance of payments (4-quarter sum, % of GDP)  
Current account balance  
Net portfolio investment Net other investment  
Net derivatives Net direct investment  
As a result, in full-year 2018, Russia’s net external position  
increased by nearly USD 100 bn to the equivalent of 22.4% of GDP  
8
(
compared with 17.3% the previous year). This change has reflected  
6
4
major capital outflows following the tightening of US sanctions in  
April 2018: stocks of foreign direct investment and portfolio  
investment declined by 6.2% and 9.5%, respectively. The  
improvement in the external position also reflects the contraction of  
loans (down 13%). Russia’s external debt continued to decline in  
2
0
-2  
2
018 (by USD 64 bn) and shrank to only 27.4% of GDP (100% of  
exports) at year-end 2018, compared with more than 41% of GDP  
157% of exports) in Q2 2016.  
-4  
-6  
-8  
(
In the first two months of 2019, the current account surplus seems  
to have increased slightly due to the decline in imports, according to  
the central bank’s preliminary estimates. Capital inflows accelerated  
despite the risk of tighter US sanctions. Government bonds held by  
non-resident investors increased for the second consecutive month,  
although they are still lower than in the previous year. In early March,  
non-resident investors held nearly 26% of government bonds issued  
in roubles. Non-resident investors were attracted by high yields on  
Russian government bonds at a time when interest rates are  
extremely low in Europe, and to a lesser extent, in the United States.  
2
013  
2014  
2015  
2016  
2017  
2018  
Source: CBR  
To date, there is strong dissension in Congress about the best  
measures to take against Russia, and President Trump is still  
opposed to them.  
Even if legislation is adopted, over a 1-year horizon, it would not  
endanger the Russian government’s external financing needs,  
which are estimated at a little under USD 80 bn.  
With the increase in oil prices since the beginning of the year and  
the decline in financial market pressures, the monetary authorities  
have begun purchasing foreign currencies again, which did not  
prevent the rouble from gaining 5% against the US dollar in  
Q1 2019. Foreign exchange reserves increased by USD 9 bn to  
more than USD 390 bn at the end of February, five times the  
amount of debt servicing from a 1-year horizon.  
Risk of tighter US sanctions  
In August 2018, Democrat and Republic senators Chris Van Hollen  
and Marco Rubio presented Congress with a bipartisan bill,  
Defending Elections from Threats by Establishing Redlines Act, also  
known as the Deter Act, which aims to sanction the Russian  
authorities suspected of US election interference in 2016. After the  
bill was rejected, the two senators submitted a new version on  
3
April 2019 that was extremely similar to the previous one. The  
draft bill aims to sanction any country that influences US election  
results in any manner (based on the findings of an investigation by  
the Director of National Intelligence). If the law is adopted and  
Russia is found guilty of interference, US persons would be totally  
prohibited from purchasing Russian government bonds as well as  
bonds from companies owned or controlled by the Russian  
government. Sanctions would also be imposed on companies in the  
finance, energy and defence industries. Sberbank, VTB bank,  
Gazprombank, Vnesheconombank and Rosselkhozbank would be  
prohibited from making transactions with the United States. In the  
energy sector, any new investment by American entities would be  
prohibited. Lastly, any politicians or oligarchs implicated in US  
election interference would be prohibited from entering US soil and  
would be banned from making transactions with US persons.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
Le site contient 2369 articles et 603 vidéos