The Russian economy expanded 1.7% yoy in Q3’19 (preliminary estimate) which was an improvement from 0.9% yoy in Q2. Growth for 9M’19 languished at 1.1% but the Economy Ministry is maintaining its target growth rate of 1.3% for 2019.
The Russian Central Bank has been responding to weak growth and inflation running below its 4% target by cutting rates this year with the benchmark rate now at 6.5%, down from 7.75% at the start of the year. Elvira Nabiullina, the Governor of the Central Bank, noted in a speech to parliament on Wednesday that “A delay in budget spending had a restraining influence on economic growth in the first half and contributed to a faster decline of the inflation rate. Now the budget policy turns from growth-restraining to being supportive of it”. Added to this, Anton Siluanov, the Finance Minister also commented that Russian GDP grew 2.2% yoy in October as spending on national projects started to ramp up.
In terms of the outlook, Nabiullina described policy as neutral with rates in the 6-7% range but indicated there was still scope for some further monetary easing. Given an anaemic growth outlook, benign inflationary pressures and relatively high real rates there certainly seems scope for further rate cuts in 2020.
Russia faces a number of structural challenges that constrain potential growth estimates to around 1.6%-2%. One aspect is productivity, the need to improve institutional strength and ease of doing business but another is an unfavourable demographic profile. According to data from Rosstat, in 2018 Russia’s population declined for the first time since 2008: while the government is implementing initiatives to try to address this a quick fix is unlikely.
Russia is fortunate in having asset buffers, a positive NFA position, low debt levels and a flexible exchange rate. Plus, the discipline of the 2017 fiscal rule has boosted Russia’s credit profile enabling it to replenish its National Wealth Fund as oil prices recovered from the lows exceeding budget estimates: a balanced primary budget has been targeted assuming a $40 (real 2017 terms) oil price but was then relaxed in 2018 to allow a 0.5% primary deficit. These financial strengths and buffers have enabled Russia to withstand the post-2014 lower oil price environment in conjunction with international sanctions. Clearly, the sanction risk has not gone away but Russia’s asset buffers enable it to weather more challenging periods.