Russia’s macro indicators end 2021 in good shape as the economy recovered quickly from the double whammy of coronacrisis and an oil price shock.
And the stock market was booming until geopolitical fears over a possible Russian invasion of Ukraine appeared at the end of October, which have dominated the Russian investment story ever since. Heightened fears of sanctions have weighed on Russia’s market confidence since December and caused a significant withdrawal of non-residents from local financial instruments.
As of end-December, the share of non-residents in the OFZ market had fallen to c19% of the total – a 6-year low and down from the peak of 34% set in March 2020.
However, while the Russian financial market has been under pressure since end-2021, economic indicators, supported by strong oil price growth, have remained healthy and even surprised to the upside.
That has resulted in the reappearance of a triple surplus of trade, current account and federal budget. The current account surplus ended 2021 at around $120bn – an all time high – which is easily enough to cover the $40bn of OFZ owned by foreign investors so if they depart the federal budget will barely be impacted. At the same time the monetary reserves topped $630bn in January, enough to cover Russia’s entire external and public debt, making the country impervious to sanctions.
The economy has responded to these stimuli by picking up, but not booming.
According to Rosstat, industrial production grew 6.1% y/y in December – above consensus expectations, or 4.5%. Thus, in 2021, industrial production rose 5.3% y/y and completely recouped its losses in 2020 (-2.1%).
Despite the strong figure in 2021, the structure of growth shows an increased dependence on the commodity extraction sector – over the last consecutive months, its growth has been in the double digits (partly explained by the base effect), while output growth in manufacturing has slowed from an average 5.2% growth for 9M21 to 4.3% in December.
In January, growth in the commodity extraction sector is expected to continue to outpace output growth in manufacturing, which according to PMI (51.8 in January vs 51.6 in December) is likely to remain flat.
A recovery in consumption can be seen from the banking sector statistics, which have also continued to show strength in retail lending growth.
According to the CBR, retail loans rose 23.2% y/y in December from 22.1% y/y in November, primarily driven by mortgage market growth. On the funding side, the performance of the retail deposit market was relatively solid with 5.7% y/y growth in December vs 6% in November. However, the net saving rate is still below the pre-pandemic level – hence, it justifies the CBR’s decision to raise the key rate further in order to cool down the lending market and curb inflation pressure.
Higher inflation and fading effects of subsidies pushed the real wages down in October amid deepened divide in the labour market. The worsened epidemiological situation brought fewer drags to the economic performance than expected.
The labour market constraints and persisting bottlenecks in the global supply chains might bring the economy to an overheated state and weaken the growth momentum. Analysts expect GDP growth to slow to 2.7% y/y in 2022.
Russia’s GDP will decelerate to 2.4% in 2022 and to 1.8% in 2023, the World Bank said in its Global Economic Prospects report. "Growth in the Russian Federation - the region’s largest economy - is projected to moderate to 2.4% in 2022, as macroeconomic policy continues to tighten and domestic demand wanes, and to further decelerate to 1.8% in 2023, as industrial commodity prices edge down," the World Bank’s experts said.
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