Emerging

A fragile recovery but resilient fundamentals

st  
Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
1
7
RUSSIA  
A FRAGILE RECOVERY BUT RESILIENT FUNDAMENTALS  
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. According to the Central Bank of Russia (CBR), the banks have sufficient reserves to cover the entire amount  
of restructured loans.  
FORECASTS  
AS THE PANDEMIC SURGES IN LATE 2019, A VACCINATION  
2
019  
2020e  
2021e  
2022e  
CAMPAIGN IS ROLLED OUT  
Real GDP growth (%)  
1.3  
4.5  
-4.5  
3.4  
3.8  
3.5  
3.0  
3.5  
Russia has had to cope with a surge in the Covid-19 epidemic since  
Q4 2020. The number of new cases has increased 4-fold between late  
September and early January. So far, the official figure is 60,000 deaths,  
or a fairly low mortality rate of 408 deaths per million inhabitants. But  
the official figures probably underestimate the scope of the pandemic.  
A vaccination campaign was launched in early December using the  
Sputnik V, a locally developed vaccine, even though clinical trials  
have yet to be completed. The first phase of the vaccination campaign  
targets medical professionals and teachers (after military personnel)  
as well as individuals over age 60. In early January, 800,000 individuals  
had been vaccinated. Deployment of the vaccination will necessarily  
take a long time, both in terms of vaccine production and covering of  
the population (140 million inhabitants), especially since, according  
to various polls, close to 60% of Russians were reticent about being  
vaccinated.  
Inflation (CPI, year average, %)  
Central Gov. balance / GDP (%)  
Public debt / GDP (%)  
1.9  
-4.0  
18.6  
1.9  
-1.5  
18.8  
2.5  
1.1  
14.1  
3.8  
16.5  
2.0  
Current account balance / GDP (%)  
External debt / GDP (%)  
28.5  
444  
15.1  
62.1  
31.0  
450  
16.9  
74.0  
29.0  
453  
16.0  
72.0  
27.0  
455  
15.5  
70.0  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDRUB (year end)  
e: ESTIMATE & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS ECONOMIC RESEARCH  
A STILL PARTIAL RECOVERY OF ACTIVITY  
y/y, %  
A PARTIAL, FRAGILE RECOVERY  
1
0
5
0
5
The Russian economy was hit by a smaller recessionary shock than in  
most of the other emerging countries. Since Q2 2020, however, activity  
has barely levelled off. On a year-on-year basis (y/y), GDP was still  
contracting 4% on average in October-November, vs -3.4% in Q3 2020.  
Based on these preliminary estimates, GDP will still fall 3.5% short of  
the Q1 level. In November, oil production amounted to 9.3 m barrels/  
day (mb/d), a 12% decline from the Q1 figure, mainly due to OPEC+ oil  
production quotas. Natural gas production was also down 6% compared  
to Q1. Excluding the extractive industries, activity plummeted in the  
hotel & restaurant, leisure and transport sectors, down between 10%  
and 25% in volume between January and September 2020, compared to  
the same period in 2019. In contrast, manufacturing and construction  
were both more resilient. In November, manufacturing activity even  
grew 1% y/y.  
-
GDP  
-
10  
-15  
20  
Oil output  
Manufacturing production  
-
2
017  
2018  
2019  
2020  
CHART 1  
SOURCE: ROSSTAT, MINISTRY OF ECONOMIC DEVELOPMENT, JODI  
An analysis of the components of demand, however, underscores the  
fragility of the recovery. In Q3, private consumption was the sole growth  
engine (3.7% q/q seasonally adjusted). In contrast, public expenditure  
and investment failed to pick up. Net foreign trade even made a nega-  
tive contribution to growth due to the ongoing decline in exports.  
Worse, the rebound in consumption seems to be winding down. On  
average in October-November, retail sales were still declining 2.2%  
y/y. Two powerful tailwinds are 1) rising unemployment (6.1% in  
November vs. 4.6% in Q1), and 2) accelerating inflation (4.9% y/y in  
December, vs 2% in Q1). With the surge in food prices (+6.7% y/y in  
December), the government opted to introduce targeted price controls.  
Monetary policy easing through the summer combined with measures  
to subsidize mortgage rates for households mainly helped stimulate  
mortgage loans.  
Despite incentives to encourage investment in housing, total investment  
remained sluggish until Q3, due to the climate of uncertainty and  
declining exports. Gazprom scaled back its investments by 18% in 2020.  
The bank  
for a changing  
world  
st  
Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
1
8
Yet PMI indicators point to renewed confidence in the manufacturing  
sector. Moreover, non-hydrocarbon exports, which account for a little  
more than half of total exports, began accelerating again in September-  
October. If household consumption resists, investment could begin to  
contribute to growth again, providing a broader base for the recovery.  
We expect to see an improvement in the extractive industries, with a  
planned but moderate increase in oil production starting in February-  
March (+0.13 mb/d or an increase of 1.4% from current levels).  
CREDIT RISK IS MANAGEABLE FOR THE BANKING SYSTEM  
According to BCR, corporate debt has increased by 9.3 points of GDP  
since the beginning of the crisis due to the recession and the automatic  
impact of the rouble’s depreciation. At 62.6% of GDP, corporate debt  
is still lower than its peak at year-end 2015 (70.8% of GDP). Service  
sector companies and SME have obviously been hit hardest (notably  
air transport, although it benefits from government support). However,  
The recovery will still be restrained by the monetary authorities’ lack the tourism, hotel and catering sectors account for a small share of  
of manoeuvring room due to inflationary pressures (the central bank’s all bank lending (1.1%). Production quotas and the decline in oil prices  
key policy rate has been held at 4.25% since July) and a cautious fiscal have weakened the hydrocarbon sector, but its debt burden is still mo-  
policy.  
derate and the financial situation is stable. Higher oil prices and, to a  
lesser extent, increased production should help consolidate the sector.  
Despite the recession, the ratio of loss loans and problem loans  
has remained practically unchanged at 10.7% between March and  
October. At the same time, however, the banks have restructured  
RUB 6.6 trillion in loans (about 9% of all loans), including RUB 5 trillion  
for major corporations, RUB 0.8 trillion for SME and RUB 0.8 trillion for  
households. Restructured loans are concentrated in the oil and natural  
gas sector (14%), the metal industry (13%), commercial real estate  
MILD IMPACT ON PUBLIC AND EXTERNAL ACCOUNTS  
Apparently, the deterioration in public finances was relatively mild in  
2
020. After reporting fiscal surpluses in 2018 and 2019, the central  
government deficit should rise to 4% of GDP this year (the 12-month  
cumulative total was only 3.6% in November) reflecting the need for  
fiscal support. The budget also benefited from a BCR transfer of 1.1%  
of GDP. Even so, fiscal revenues have held up well. Consequently, the  
public debt ratio will hold at 15-20% of GDP at year-end 2020 (it was  
only 16% of GDP in September), despite the rouble’s sharp depreciation  
(
12%) and the SME segment, all sectors combined (13%).  
The need for additional provisions depends on the classification of  
restructured loans prior to restructuring. For now, the BCR allowed  
banks to postpone their provisioning needs for all loans (including  
restructured loans) through 1 April for major corporate loans and  
through 1 July for loans to households and SME.  
(
sovereign debt in foreign currencies still accounts for 17% of the total).  
In 2021, the government expects to have a little more manoeuvring  
room in terms of spending to avoid hampering the recovery, but  
regulated withdrawals from the National Wealth Fund (NWF) will be  
limited to 1% of GDP, even if oil prices were to plunge again. At the  
end of October, NWF assets were valued at USD 177 bn (11.5% of GDP)  
compared to USD 125 bn at year-end 2019.  
Using the average provision coverage ratio observed for problem  
loans (52%) and assuming that these loans and those in the category  
just above them were restructured, the need for provisions would be  
1
RUB 1.6 trillion (i.e. 2.2% of all loans) . Although provisioning charges  
On the external side, the current and financial accounts all carry traces  
of the decline in oil prices and the outflow of non-resident portfolio  
investments. According to BCR estimates, the current account surplus  
was reduced by more than half in January-November, compared to  
the same period in 2019, while the deficit of financial transactions of  
the private sector widened by nearly 80%. Even so, Russia managed to  
consolidate its foreign reserves. Another positive point is that part of  
the capital outflows were due to the external deleveraging of non-fi-  
nancial private sector companies and banks (by USD 12.8 bn and  
USD 4 bn, respectively, between year-end 2019 and September 2020).  
will probably continue to rise, the increase in restructured loans slowed  
sharply in H2, for both companies and households alike.  
Lastly, according to BCR, the banks’ macro-prudential reserves account  
for 9% of all loans, which is largely sufficient to absorb any losses.  
Completed on 11 January 2021  
François Faure  
francois.faure@bnpparibas.com  
The main adjustment variable was actually the rouble, which  
depreciated by 17% between the end of December 2019 and April  
2
020, before stabilising with some difficulty thereafter. Once again,  
the Russian currency is highly correlated with oil prices, despite BCR  
interventions to sell dollars up to mid-January. The rouble should get  
some support from oil prices, assuming they continue to rise. However,  
the BCR has resumed buying USD on the fx market since January 15.  
Yet the rouble’s potential appreciation is likely to be hampered by other  
more structural factors, such as the revision of tax agreements with  
offshore centres (notably Cyprus) and the diversification of investment  
savings by wealthy households into instruments denominated in  
foreign currencies.  
1
The maximum is estimated at EUR 3.3 trillion if no provisions had been made for any of the restructured loans.  
The bank  
for a changing  
world  
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 2682 articles et 705 vidéos