Russia Country Report Oct17 - October, 2017

October 3, 2017

Lifted by higher oil prices, Russian GDP has returned to positive growth this year as anticipated. Growth in the second quarter was 2.5%, more than expected, and growth forecasts for the whole year have been raised slightly from 2% to 2.1% in September, mainly thanks to higher than expected oil prices.

Analysts see GDP rising by 1.5 % p.a. through 2019 on the assumption that oil prices remain roughly at their current levels.

Growth will be driven by domestic private demand, which has gradually recovered this year. Household consumption is supported by increasing real wages and reviving household borrowing.

Fixed investment is also expected to continue moderate growth as Russian industry already operates near full capacity. Further growth of fixed investment is limited, however, especially by the difficult business environment and uncertain economic outlook.

Another factor holding back investment is the lack of corporate borrowing as interest rates are still too high, despite a string of cuts by the CBR. On the other hand consumer borrowing is starting to rise again. As fear and effect of sanctions fade, Russian companies are increasingly issuing debt on the international markets where emerging market bonds are in high demand, which are cheaper and have longer maturities.

Government spending is not expected to increase in real terms this year and the preliminary budget framework anticipates even harsher spending discipline in coming years. In the run up to the 2018 presidential elections president Vladimir Putin has already called for more spending on the social sphere and agriculture. However, the federal budget deficit this year is going to be lower than expected and this extra spending will not be a burden.

Inflation has slowed and was at record lows in September making room for more interest rate cuts. The  Central Bank of Russia's has already reached its  4% target and deflation in the summer meant inflation was at 3.7% at the end of September. The CBR has signalled that it will continue to cut interest rates if inflation pressures permit.

Despite brisk export growth, the volume of Russian export growth should slow as e.g. oil & gas export levels are already historically high. After three years of contraction, the volume of imports has increased strongly this year supported by recovering demand and appreciation of the ruble. This year's import growth forecast has been raised substantially, but growth should slow gradually in coming years.

Some good news on export revenues was the mega-harvest Russia brought in -- more than 127mn tonnes of grain, significantly up from the previous year of 119mn tonnes, which was itself a record. This means Russia will earn some $20bn from grain exports this year.

Forecast uncertainty is caused by oil price trends, which impact the Russian economy rapidly. The approaching presidential election could add pressure to increase public spending and temporarily raise growth.

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