Russia Country Report Feb21 - February, 2021

February 5, 2021

For an outlook of what bne IntelliNews expects this year read our 2021 Outlook

Russia finished 2020 with a milder than expected 3.1% contraction, according to preliminary data from the Economics Ministry released on February 1, which was still the biggest slump since 2009, Russia’s Federal Statistics Service said.

Russia suffered a smaller contraction than most major economies in 2020 after the government opted not to reimpose a lockdown in the second half of the year. Growth in eh summer was driven by a pick up in consumption.

Economists forecast a 3.7% drop in a Bloomberg survey. The Economy Ministry had projected a decrease of 3.9%, the Central Bank of Russia (CBR) between 4% and 6% and the International Monetary Fund (IMF) -4.1%. Investment banks were more upbeat with BCS Global Markets forecasting a contraction of -2.7 and Renaissance Capital -2.5%.

Most of the economic hit came in the first half, when the government imposed a strict lockdown and global oil demand slumped due to travel restrictions.

The summer saw a rapid rebound after the lockdown restrictions were lifted, driven largely by surging consumption. However, in September as the second wave of the coronavirus epidemic made itself felt, growth slowed again as many Russians chose to self-isolate voluntarily.

Russia’s balance of payments remained in a healthy state in 2020 despite the pandemic, a major decline in economic activity and capital flows. Analysts forecast significant improvement in the country’s external accounts in 2021.

In 2020, Russia posted a current account surplus of $32.5bn, according to preliminary data released by the CBR yesterday. This is twice lower than a year ago ($64.8bn in 2019), but still is a positive achievement, given the recession and a spike in capital outflows caused by the pandemic. Last year, exports from Russia fell 21.5% y/y to $329.5bn while imports were down 5.7% y/y ($ The volume of foreign direct investment fell by a massive 20 times to $1.4bn from $28.9bn a year earlier. Net private capital outflows doubled to $47.8bn from $22.1bn in 2019.

Current account surplus will rise by 50%+ in 2021. Analysts forecast that the state of Russia’s external accounts will see significant improvements in 2021 as Russian and global economies return to growth from 2Q21, which is likely to be accompanied by stronger demand and more stable commodity prices.

Analysts expect c/a surplus to rise to $46bn in 2021 – the actual number could be even higher if crude oil prices remain at current levels and the global economy posts a faster recovery. However, Russia will continue to post capital outflows (c$30bn in 2021) as the country’s corporate and financial sectors continue to shrink their external debt leverage.

Consumer prices rose by 0.8% m/m in December, up from growth of 0.7% in November and 0.4% last December according to preliminary estimates.

As a result, y/y inflation reached 4.9% in December. The most significant growth in both m/m and y/y terms was registered in food prices, which were up 1.5% m/m and 6.7% y/y (they rose a respective 0.7% and 2.6% in December 2019). Prices on non-food items rose 0.4% m/m, resulting in 4.8% annual growth (compared with 3.0% a year ago). Service prices also added 0.4% m/m, but in y/y terms they were up just 2.7% (versus 3.8% a year ago).

The weaker ruble and an increase in prices on agricultural products (due to higher global prices and ruble depreciation) were important factors driving inflation higher in 4Q20. However, as the effect of these factors should start to fade away in 1Q21, analysts expect inflation to start decelerating in 2Q21.

Rate cuts are considered over for the meantime as inflation rose strongly towards the end of the year. However, they could resume in the second half of the year.

On the production side, the industrial sector saw a significant improvement in December 2020, almost closing the contraction gap (-0.2% y/y in December 2020 vs. -1.5% y/y in November 2020 and -5.7% y/y in October 2020). IP appeared to outperform consensus, MinEcon and our expectations (-3.9% y/y) by contracting 2.9% y/y (-2.5% y/y in 4Q20 vs. -4.8% y/y in 3Q20 and -6.7% y/y in 2Q20).

In 2020, federal budget deficit reached 3.8% of GDP, according to preliminary estimates by the Finance Ministry. Last time the deficit was close to this level was in 2010 (-3.9%). In nominal terms, deficit stood at RUB4,102bn ($57bn). In 2020, budget expenditures totalled RUB18.7 trillion or 90.9% of the plan, while budget revenues reached RUB22.8 trillion (116.1% of the plan).

There is a possible return to budget surplus in 2021 in an optimistic scenario. According to Minfin data, the volume of budget deficit last year was lower than the increase in the National Welfare Fund: $57bn vs $58bn. That shows that, in a broad sense, Russia’s state finances remained close to fully balanced – a remarkable achievement given the pandemic. In 2021, analysts forecast federal budget deficit to fall to around 1% of GDP – this estimate is based on a $51/bbl average crude oil price and 3.3% y/y GDP growth projection. However, the current level of oil prices shows that our estimates might prove to be too conservative, which means that under an optimistic scenario Russia might even manage to close its finances with no deficit in 2021. From 2022 onwards, analysts forecast a return to consistent budget surpluses.

Revenues from exports of oil, oil products and gas were still more than 40% lower than a year ago, mainly due to low export prices. Revenue from exports of other goods, on the other hand, was about the same throughout the second half of the year as a year earlier. Revenues from exports of services were still more than 35% lower than a year ago, especially as Russia's tourism revenues remained very low.

Expenditure on imports of goods and services from Russia continued to recover slightly in the fourth quarter. Expenditure was still about 15% lower than a year earlier.

Imports of services also turned slightly better, but import expenditure was still about 40% lower than a year earlier. The reason is the collapse of Russian foreign tourism, where tourist spent $27bn last year while on holiday.

With imports declining slightly more than the decline in export earnings, Russia's goods trade surplus has been significantly lower than usual for almost a year. On the other hand, the sharp decline in Russian tourism spending in particular, as well as in dividends and interest paid abroad by Russian companies, has kept Russia's current account in surplus, although the surplus shrank by 2% of GDP in 2020.

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