Russia Country Report Feb18 - February, 2018

February 2, 2018

The Russian economy grew by 1.5% in 2017 as it finally emerged from several years of recession.

The country's GDP in 2017 increased to RUB92.08 trillion from RUB85.92 trillion in 2016.

In 2016, the country's GDP contracted by 0.2%, and in 2015 fell by 2.5% after slowing growth to 0.7% in 2014.

The result was middling. Initially, the Ministry of Economic Development forecasted an annual economic growth of 2% or more in 2017 while the Central Bank expected 1.7-2.2%.

The outlook for 2018 is better – but not by much. The Ministry of Economic Development expects about 2% economic growth, while most of the IFIs are predicting about 1.8% of growth. The outlier is Goldman Sachs, which predicted 3.3% of growth for 2018 on the expectation of higher oil prices.

Growth maybe lackluster but most of the indicators are now at “normal country” levels. Unemployment is at 5% and inflation at a record low of 2.5%. Wages are growing again, albeit modestly and industrial production is expanding, but at an anemic 0.5%.

The one emerging market level indicator is the overnight interest rate of the CBR, which is at 7.75%. The Central Bank of Russia (CBR) has cut the rate half a dozen times since an emergency hike in 2014 and is expected to cut a few more times in 2018 to bring it down to around 6-7% by the end of the year.

The external environment has also changed to Russia’s advantage. Rising oil prices, which topped $70 in January, are adding money to the budget. And they have improved the balance of payments to maintain a surplus.

Russian revenues from goods and services exports, as well as spending on goods and services imports were each up roughly 20% y/y in the final quarter of 2017. Growth in goods imports was about 20%. Russian spending on travel abroad was up by nearly 30%, matching the growth pace of previous quarters. The trade and current account surpluses of the fourth quarter were notably large on export earnings from higher oil prices.

None of this will lead to a boom as investment and reforms are on hold until the presidential elections in March are passed. All the action is loaded into the second half of 2018 and it remains totally unclear which direction Putin will take the country after he is reappointed. It could go either way: deep structural reforms or stagnation.

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