Emerging

PDF
th  
9
EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
Russia  
The risk of new sanctions puts pressure on the rouble  
Despite the improvement in economic fundamentals (strong rise in the current account surplus, accelerating GDP growth and a  
fiscal surplus), the rouble depreciated by 13% against the dollar between April and September 2018. Tighter US sanctions in April  
and again in August 2018, combined with the threat of new sanctions this fall, triggered massive capital outflows. Despite a highly  
volatile rouble, bond and money market pressures have been mild. To counter the downside pressure on the currency, the Russian  
central bank raised its key rates in September, for the first time since 2014, and halted its foreign currency purchases on behalf of  
the finance ministry.  
Growth accelerates in H1 2018  
1- Forecasts  
The economy grew 1.6% year-on-year (y/y) in the first half of 2018.  
Tighter US sanctions did not hamper activity, which was driven by  
dynamic domestic demand (bolstered by higher real revenues) and  
a rebound in the manufacturing industry. The upturn in  
manufacturing can be attributed to higher oil production quotas, but  
also to the increased output of machinery and capital goods, buoyed  
by dynamic investment and household consumption.  
2
016  
2017 2018e 2019e  
Real GDP growth (%)  
-0.2  
1.5  
1.7  
1.7  
Inflation (CPI, year average, %)  
General Gov. balance / GDP (%)  
Public debt / GDP (%)  
7.1  
3.7  
2.7  
0.5  
4.1  
1.7  
-3.7  
-1.5  
13.3  
12.6  
2.6  
12.5  
5.5  
12.3  
4.5  
Current account balance / GDP (%)  
External debt / GDP (%)  
2.0  
39.5  
318  
32.9  
347  
30.3  
375  
27.7  
420  
Although industrial output was still dynamic in July (+3.9% y/y),  
economic activity is expected to slow in the quarters ahead for  
several reasons including the rouble’s depreciation, the VAT hike on  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDRUB (year end)  
11.1  
60.3  
10.3  
58.3  
12.8  
67.0  
12.9  
69.0  
1
January 2019, higher interest rates and the risk of a further  
e: BNP Paribas Group Economic Research estimates and forecasts  
tightening of US sanctions.  
In the longer term, raising the retirement age and a 6-year  
investment spending programme should help boost the potential  
growth rate.  
2
- Inflation is under control  
Headline inflation (y/y, %)  
▪▪▪ Core inflation excluding food and energy (y/y, %)  
Inflationary pressures are under control  
2
0
Price increases were mild in the first eight months of the year and  
averaged 2.4% y/y. Inflationary pressures have picked up slightly  
since June (+3.1% y/y in August), but are still lower than the central  
bank’s inflation target of 4%, which it revised upwards in September.  
The economy is feeling the effects of the rouble’s depreciation1  
while nearing full production capacity utilisation.  
1
1
5
0
5
0
The VAT hike on 1 January 2019 is expected to lift prices by an  
additional 0.8 to 1.1 percentage points in 2019, assuming the rouble  
does not depreciate any further. The 2-point increase in the  
standard VAT rate applies to 66.1% of consumer goods. Moreover,  
the VAT rate will be raised from 10% to 20% for 25.7% of consumer  
goods.  
2
013  
2014  
2015  
2016  
2017  
2018  
Source: CBR, BNP Paribas  
To counter the rouble’s high volatility and to dampen inflationary  
expectations, the central bank raised its key rates by 25 basis points  
A fiscal surplus and the rebuilding of sovereign fund in  
018  
2
(
bp) at September’s monetary policy committee meeting.  
In the first 8 months of the year, the federal government reported a  
fiscal surplus of RUB 1830 bn, the equivalent of 3.1% of GDP,  
compared to a fiscal deficit of 0.7% of GDP in the year-earlier period.  
After reporting a deficit for six consecutive years, the finance  
ministry is forecasting a full-year surplus of about 1.3% of GDP. The  
consolidation of public finances is mainly due to a big increase in  
fiscal revenues arising from oil & gas activities (+46.6%). Yet  
excluding oil & gas, the fiscal deficit still narrowed by more than  
1
The central bank estimates that a 10% decline in the nominal effective  
exchange rate generates a 1 percentage point increase in prices over a 3- to 6-  
month horizon.  
th  
10  
EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
1
1% in the first 8 months of the year, thanks to the combination of  
3
- Downward pressures on the rouble  
higher non-oil & gas revenues (+15%) and tight control over public  
spending, which rose only 2.6% over the period. The non-oil-and-  
gas deficit was the smallest in six years.  
RUB per USD (rhs) ••• Foreign exchange reserves (USD bn, lhs)  
5
00  
00  
00  
00  
00  
0
100  
80  
60  
40  
20  
0
At the same time, windfall revenues from oil and gas activities were  
funnelled into the National Wealth Fund (NWF). In the first 8 months  
of the year, the NWF increased by USD 10 bn to USD 75.8 bn. At  
the end of the year, we must also add in the USD 38 bn acquired by  
the central bank on behalf of the finance ministry.  
4
3
2
1
For the next three fiscal years, the government has decided to  
pursue a less cautious and less conservative fiscal policy. Although  
it is forecasting fiscal surpluses of 1.8%, 1.1% and 0.8% of GDP,  
respectively, in 2019, 2020 and 2021, the government plans to  
increase the public spending to GDP ratio (+1.1 percentage points  
of GDP in 2019) for the first time since 2015.  
2
012  
2013  
2014  
2015  
2016  
2017  
2018  
Source: CBR, BNP Paribas  
The increase in public spending can be attributed notably to the  
social and economic development programme announced by  
president Putin last May. The equivalent of 7% of GDP  
shore up the National Wealth Fund) for an amount equivalent to  
more than USD 24 bn between April and August. To counter the  
rouble’s decline, the Russian authorities decided at the September  
monetary policy committee meeting to halt currency purchases on  
behalf of the finance ministry through the end of the year.  
(
RUB 8 trillion) will be invested in the country’s development  
between 2019 and 2024 to develop infrastructure, increase the level  
of education and boost healthcare spending. The government’s goal  
is to raise the investment rate from 21.7% of GDP in 2017 to 25% of  
GDP by 2024. Yet even if the government manages to implement  
this programme, private investment will continue to be hampered by  
strong structural constraints.  
Despite the show of mistrust on the part of non-resident investors,  
pressures in the money and bond markets are still mild. Between  
April and September 2018, 10-year government bond yields rose  
only 100bp, deposit rates declined and the increase in 5-year CDS  
was limited to 25bp. Yet it could become harder to finance its USD-  
denominated debt if the US Congress were to approve two  
proposals, the Deter Act and the Daskaa Act. Both bills call for  
limiting the access of Russia’s state-owned banks to the market for  
USD and to prohibit US investors from holding newly issued  
Russian bonds. Neither bill is very likely to be adopted because they  
are only supported by a minority of senators. This situation could  
change, however, after the US mid-term elections.  
The finance ministry does not intend to use the revenues generated  
by the VAT increase (estimated at 0.5% of GDP) to finance this  
social and economic development programme. Instead, it will be  
financed through domestic market bond issues each year for the  
equivalent of 0.5% of GDP.  
The rouble depreciates sharply despite a higher  
current account surplus  
Yet Russia’s foreign exchange reserves, which amounted to  
USD 373 bn at the end of August, largely cover the refinancing  
needs of the country’s external debt, which are estimated at  
USD 79 bn by year-end 2019.  
In H1 2018, the current account surplus swelled to the equivalent of  
.7% of GDP, up from 3.3% of GDP in the year-earlier period. This  
6
improvement can be attributed to the strong increase in the trade  
surplus (+3.3 percentage points to 11.4% of GDP), thanks to the  
increase in oil and gas exports and to a lesser extent other types of  
exported goods.  
Yet despite the improvement in macroeconomic fundamentals,  
Russia reported massive capital outflows following the tightening of  
US sanctions. The rouble depreciated by 13% against the dollar  
between April and September.  
According to the balance of payments statement, sales of Russian  
assets by non-resident investors swelled to USD 17 bn in the  
second quarter. In comparison, this figure averaged more than  
USD 32 bn per quarter between Q3 2014 and Q1 2015. This  
movement continued in July and August. As a result, the share of  
sovereign debt held by non-resident investors declined by  
7
.9 percentage points between April and August to 26.6% on 1  
September.  
The rouble’s depreciation was accentuated by the central bank’s  
foreign currency purchases on behalf of the finance ministry (to  
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 2062 articles et 568 vidéos