Emerging

Still large surpluses

st  
9
EcoEmerging // 1 quarter 2020  
economic-research.bnpparibas.com  
Russia  
Still large surpluses  
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.  
Growth prospects remain weak  
1
- Forecasts  
Economic growth in Q3 2019 accelerated significantly to 1.7% (y/y)  
after growth of just 0.7% y/y in the first half. The agricultural sector  
has seen the strongest growth. Domestic demand recovered slightly,  
notably under the impetus of an increase in consumer spending,  
whilst exports continued to suffer from unfavourable global  
conditions. This upturn has been helped by a sharp fall in inflation  
and the resulting relaxation of monetary conditions. In November  
2
018 2019e 2020e 2021e  
Real GDP growth (%)  
2.3  
1.1  
1.6  
1.8  
Inflation (CPI, year average, %)  
Central Gov. balance / GDP (%)  
Public debt / GDP (%)  
2.9  
2.9  
4.5  
1.6  
3.7  
1.0  
4.0  
0.6  
14.3  
6.9  
14.9  
4.3  
15.2  
3.3  
15.5  
3.0  
Current account balance / GDP (%)  
External debt / GDP (%)  
2
019, prices rose by only 3.5% y/y, below the 4% target rate set by  
the monetary authorities. Against this background, in December  
019, the central bank made its fifth consecutive cut to its policy rate,  
27.5  
375  
28.5  
433  
29.0  
470  
29.5  
510  
Forex reserves (USD bn)  
2
Forex reserves, in months of imports  
Exchange rate USDRUB (year end)  
12.8  
69.4  
13.0  
61.9  
13.2  
65.0  
13.3  
66.5  
taking it to just 6.25%, its lowest level since 2014. Lending rates (in  
both nominal and real terms) and rates on government 10-year  
bonds both fell significantly over the course of last year. Ten-year  
rates were just 6.5% in mid-December (from 8.8% a year earlier),  
lower than they were before the crisis of 2014.  
e: BNP Paribas Group Economic Research estimates and forecasts  
2
- Growth remains weak  
GDP (y/y) Household spending (pp), Government expenditure  
(pp) Investment (pp) Net Exports (pp) Statistical errors (pp)  
Although growth consolidated in Q4, it is unlikely to have exceeded  
1
.1% over the whole of 2019 (from 2.3% in 2018).  
1
0
5
0
5
In 2020, economic growth is likely to benefit from a favourable basis  
of comparison. More fundamentally, the fall in inflation and the  
continuation of monetary relaxation in the first half of 2020 will  
continue to boost private investment and, to a lesser degree,  
consumer spending. Labour market conditions will continue to be  
favourable. Similarly, government investment should continue to  
increase, as the result of the introduction of development projects.  
However, the net contribution of exports to growth is likely to remain  
negative. Under the latest agreements with OPEC, signed in  
December 2019, Russian oil production is likely to be cut by 95,000  
barrels per day in Q1 2020 relative to November 2019 production  
levels (an 8.4% cut).  
-
-
10  
15  
-
2014  
2015  
2016  
2017  
2018  
2019  
Source: CBR, CEIC  
Other than a sharp fall in oil prices, the main threat to the Russian  
economy is a tightening of sanctions, which would affect investment.  
Demographic change and the weakness of productive investment  
have structurally depressed growth. The active population has fallen  
steadily since 2012 and, according to the World Bank, this trend is  
likely to continue through to 2027, despite the raising of the  
retirement age.  
Predicted growth (1.6% in 2020 and 1.8% in 2021) remains too low  
to bring any significant increase in income levels for Russia’s  
population. According to the IMF, per capita income in USD terms in  
2
021 will still be 26% below pre-crisis levels. Meanwhile, although  
Meanwhile, the rate of investment growth has slowed sharply since  
2009 (2% per year on average between 2009 and 2018, from 12.5%  
from 2000 to 2008). In addition, although the level of investment has  
remained relatively stable, at 23% of GDP, the structure of  
investments has changed. According to the Conference Board, the  
share of productive investment has fallen in favour of construction  
investment, holding back technological progress. The stock of  
the unemployment rate has hit a low point, at just 4.4% in Q3 2019,  
the increase in real income has slowed following the increase in  
VAT. In Q2 2019 there were 19.8 million people living in poverty  
(
(
some 13.5% of the population), compared to 16.1 million in 2014  
11.2%).  
st  
10  
EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
private capital had fallen to 159% of GDP by 2017, from 282% of  
GDP in 2000.  
3- Foreign currency reserves and sovereign wealth fund  
Sovereign wealth fund (lhs, USD bn)  
Public finances will remain robust  
▪▪▪ Foreign exchange reserves (rhs, USD bn)  
180  
160  
140  
120  
100  
80  
60  
40  
20  
0
450  
400  
Over the first ten months of 2019, the government’s fiscal surplus  
was 3.5% of GDP, despite a drop of more than 1 percentage point  
(
pp) in income from oil and gas sources (7.6% of GDP). This strong  
performance in the public finances was made possible by the big  
jump in VAT receipts (up 16.7%) which contributed to the 1pp  
increase in non-oil and gas receipts, taking them to 11.3% of GDP,  
a level not seen since the period from 2000 to 2008 (when growth  
was running at an average of 7%). Spending remained controlled  
over the first ten months of the year (up 6%), despite the increase in  
investment in October. This took investment to 66.1% of the annual  
target set under the medium-term development programme.  
3
50  
00  
3
250  
2015  
2016  
2017  
2018  
2019  
Source: CBR  
For 2019 as a whole, the government is likely to record a surplus of  
1.6% of GDP, which will gradually fall to 0.6% of GDP by 2021 as oil  
revenues fall and spending rises.  
The current account stayed in surplus over the first nine months of  
019, albeit at a lower level than in 2018. It was equivalent to 4.7%  
2
Having fallen steadily since 2015, government debt stood at only  
of GDP, from 6.2% at the same point of 2018. This slight reduction  
reflected the shrinking of the trade surplus in Q2 and Q3 2019,  
resulting from lower exports of oil and gas (price and volume  
effects).  
1
4.9% of GDP in Q2 2019. This is likely to rise gradually over the  
next five years, as part of the investment between 2019 and 2024  
estimated at 1.1% of GDP per year) will be financed by debt  
(
issuance. The structure of debt remains low-risk and has been little  
affected by the sanctions introduced in August 2019. Although the  
government’s external debt (i.e. that held by non-residents in both  
local and foreign currencies) has risen, it stood at only  
USD 64.5 billion in Q3 2019, with more than 63% of the total  
denominated in rubles (USD-denominated debt was just  
USD 22.9 billion, or 36% of the total). Moreover, the government  
can always draw on its sovereign wealth fund, the National Wealth  
Fund, to finance part of its investment spending. This has been  
rebuilt, to some extent, and stood at USD 124 billion on 1 December  
Over the first nine months of the year, net outflows of capital fell  
sharply from their level in the same period of 2018 when the  
tightening of US sanctions triggered sizeable precautionary  
movements by foreign investors. Over the second and third quarters  
of 2019, the financial account recorded net capital inflows.  
This improvement in external accounts since the 2014-15 crisis  
needs to be seen in context. First, excluding oil and gas, the current  
account was in deficit to the tune of 9.8% of GDP over the first three  
quarters of 2019, reflecting the economy’s high level of dependence  
on energy exports. In 2018, raw materials still represented 67% of  
Russian exports. Secondly, FDI has fallen steeply since sanctions  
were introduced in 2014. Between 2014 and 2019, new investment  
2019, the equivalent of 7.3% of GDP, from 4.4% of GDP in  
December 2018.  
External accounts also remain strong  
(
excluding reinvestment of profits) ran at an average of only  
Since the crisis of 2014-15, Russia’s external accounts have  
USD 4.9 billion per year, compared to USD 32.5 billion per year  
between 2008 and 2013. It is hard to identify the origin of FDI into  
Russia, given the substantial movements of capital that come via  
Cyprus and the Netherlands. Even so, FDI from Europe and the  
USA fell by 88% and 41% respectively between 2015 and 2018,  
whilst investment from Asia increased by a factor of 5.2. However,  
the rapid decline in FDI from the west has hampered the  
diversification of the economy. FDI from Asia is tightly focused on  
the energy sector, whilst that from Europe and the US was spread  
across several sectors.  
strengthened. External debt has fallen by 34% from its high point of  
2013 (taking it to just USD 471 billion in Q3 2019), the dependence  
on dollar financing has eased (the share of dollar-denominated  
external debt was 49% in Q2 2019, from 61% in 2013) and the ruble  
and the oil price are no longer as tightly correlated. However,  
diversification of Russian exports is still limited and FDI has fallen  
significantly over the past five years, in line with the introduction of  
international sanctions.  
Foreign exchange reserves reached USD 436 billion in November  
2019, an increase of USD57 billion on a year earlier. They are now  
back close to their highs of 2013 (USD 486 billion) and cover  
external debt service costs 4.5 times over. This increase in reserves  
came mainly from foreign currency purchases by the central bank  
(
for a total of USD 42 billion over the first eleven months of 2019),  
with a smaller contribution coming from the current account surplus.  
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