Russia Country Report Oct21 - October, 2021

October 4, 2021

Rosstat revised its 2Q21 GDP estimates up to 10.5% y/y in the quarter, up from the preliminary estimate of 10.3% y/y. The growth was the highest since the economic bounce back in 2000, following the 1998 financial crisis. The economy returned to growth in March of this year following contractions in January and February; overall GDP fell 0.7% y/y in 1Q21.

After the significant rise in 2021 H1, economic growth slowed down at the beginning of the third quarter, closer to the pre-pandemic rate. The growth rate trended downwards due to the remaining supply-side constraints, namely disruptions in raw materials and components supplies and the gradual exhaustion of the potential to restore demand in increasingly more industries. Russia's total output reached pre-crisis levels in the second quarter,but the recovery has levelled off in recent months.

The recovery in Russian industry went into reverse in Q3. Production rose by 4.7% y/y, but it fell by 0.8% in seasonally-adjusted month-on-month terms. This marked the third monthly contraction in a row and left output 1.2% below its level in May. The manufacturing sector has stagnated since it returned to its pre-pandemic level at the end of last year and the latest surveys do not suggest a turnaround is imminent.

In contrast, retail sales performed well. Sales growth picked up from (an upwardly-revised) 5.1% y/y in July to 5.3% y/y in August. We estimate that this was equivalent to an expansion of 0.6% in seasonally-adjusted month-on-month terms, an acceleration from the rates of 0.3-0.4% m/m in recent months.

Surprisingly, most of the strength reflected a pick-up in food sales. It’s possible that part of this reflects the cash handouts to families in August ahead of last month’s elections, with households using these handouts for spending on food amid high prices. Additional handouts to pensioners last month (total giveaways amount to 1% of GDP) suggest that sales growth should remain strong at the start of Q4.

Russian government on course to end the year with a RUB1 trillion ($13.7bn) surplus, thanks to soaring revenues fromoth energy exports and non-oil tax revenues. The government is currently preparing the 2022-24udget and an updated version of the budget for this year. The economic bounce back and high commodity prices have delivered the Russian budget a windfall and revenues are soaring.

Russia's GDP is projected to grow by more than 3.5% this year from the recession in 2020. Growth is expected to slow to just over 2.5% per year between 2022 and 2023, towards a long-term growth outlook, as there are no wider market reforms that could boost economic growth in the next few years, the bank of Finland Institute for Economies in Transition (BOFIT) said in its weekly report.

“Of course, there are other factors in the forecast period that will affect the growth rate of the economy. The ruble will limit growth until next year, and on the other hand, some factors supporting the economy have improved. The price of oil has risen and market expectations of its decline have eased to such an extent that the price will soon turn to a slight decline and fall to about $65 in 2023,”OFIT said.

Improving global economic forecasts will support Russian exports. Production restrictions under the OPEC + oil agreement eased in the summer, so the outlook for Russian oil exports has improved, as has the outlook for gas exports,OFIT says. Russia's tourism revenues (more than 2% of total export revenues in 2019) are expected to recover towards the end of the forecast period.

With economic growth, household incomes will rise and employment will improve, strengthening private consumption, which is expected to slightly exceed the 2014 peak in 2023. The pension increase line for 2019–2024 will increase pensions a couple of percent faster than forecasted inflation.

In addition, especially for pensioners, the substantial lump sums paid during the Duma election will provide a temporary impetus to consumption. Aoost to consumption is also expected from the fact that households accumulated a excess amount of savings from 2020, which are still unspent. Russians' foreign tourism, which remained very low last year, is expected to recover at a good pace towards the end of the forecast period.

Investments will continue to recover and are expected to reach the level of 2012–2014 in 2023. Investment growth is not expected to be very rapid, e.g.because capacity utilization in industry is still very low. On the other hand, the state plans to provide loans from the National Welfare Fund for selected investment projects in the coming years. The aim is to involve companies, which can increase investment if other companies' investments are not marginalized at the same time.

Imports of Russian goods and imports of services other than Russian foreign tourism are expected to increase quite well as GDP grows. The growth of imports is limited by the real exchange rate of the ruble, which is expected to remain fairly unchanged, as inflation in Russia is likely to still slightly exceed the inflation rate in trading partners. The recovery in tourism spending will significantly increase imports, as spending was 10% of Russia’s total imports in 2019efore its collapse. The distance between total imports and the peak in 2012–2014 was shortened to about one tenth. Russia's current account will remain in substantial surplus over the forecast period.

In the area of public finances, there are no indications that Russia is compromising its plan to reduce the budget deficit so far (this was also in line after the recessions of 2009 and 2015). Risingudget revenues and aetter outlook for the now-expected oil price will reduce the deficit, making it possible to loosen the plan's tight expenditure estimates.

There are several significant forecast uncertainties. Unpredictable changes may occur due to the pandemic, global economic growth and oil prices. Inflationary pressures may arise in the global and Russian heterogeneous markets, the release of which would accelerate the gnawing of purchasing powery households as well as companies and the state.

More investment maye expected than expected if state project funding attracts companies so that the total investment of companies increases. The increase in government revenue leaves much room for increased budget expenditure. Some post-recession twists are still ahead and difficult to predict. Corona situations, the pace of openingorders and the return of foreign tourism may vary. The unwinding of household savings lead to surprising increases in consumption.

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