Russia's Monthly Economic Developments
July 7, 2014
July 7, 2014
- Russia’s Q1 GDP growth estimate indicates a 0.35 contraction on a seasonally adjusted quarterly basis, revealing persistent domestic demand weakness. The World Bank’s growth forecast for Russia remains unchanged.
- Inflation continues to climb on the back of persistently high food prices and core inflation while currency pressure subsided helped by increasing oil prices and a temporary ceasefire in Ukraine which lessened geopolitical tensions during parts of June.
- On June 30, President Putin signed the revisions to the budget law for 2014-2016.
- Global growth is expected to accelerate in the second half of the year supported by US-led high-income country growth and a significant easing of global financing conditions
- The World Bank increased its 2014 oil price forecast by US$3 to US$106/bbl as oil prices soared in mid-June.
Russia’s Q1 growth estimate indicates a 0.35 percent contraction of economic activity on a seasonally adjusted quarterly basis. Rosstat confirmed Russia’s initial Q1 growth estimate of 0.9 percent on an annual basis, which is close to our projected 0.8 percent and the World Bank’s baseline growth projection remains at 0.5 percent for 2014. Consumption (particularly household consumption) remains the main driver of growth and in line with our expectations, its contribution to growth decreases as income growth slows and household indebtedness remains on the rise. The now released Q1 breakdown for GDP on the expenditure side confirms slowing domestic demand: household consumption decelerating to 3.7 percent y-o-y from 4.1 percent in Q4 2013 (compared to 5.7 percent in Q1 2013) and fixed capital investment contracting by 7.0 percent y-o-y after 0.5 percent growth in Q4 2014 (compared to a contraction of 0.5 percent in Q1 2013). GDP composition data reveal a larger than expected decline gross capital formation (2.3 percentage points) compared to (one percentage point) in our forecast. The decrease in the contribution of fixed capital investment (1 percentage point) to growth was accompanied by continued destocking (1.3 percentage points), suggests pessimistic industry expectations. The growth contribution of net exports was better than projected at 1.4 percentage points, as imports downward adjustment more than off-set the smaller than expected export growth. On production side, non-tradable sectors continue their role as the engine of growth, contributing 0.5 percentage points to GDP growth, compared to 0.2 percentage points contribution from tradable sectors.
High-frequency statistics for May continue to show some divergence in industrial activity and demand trends. Aggregate industrial production increased further to 2.8 percent in May (y-o-y) compared to 2.4 percent in April (and seasonally adjusted monthly growth was 0.1 percent relative to April), driven by manufacturing. Due to higher activity in food, metal and cokes and petroleum production, manufacturing output quickened to 4.4 percent in May 2014 (y-o-y) compared to 3.9 percent in April, translating into 3.2 percent (y-o-y) growth for the first five months of 2014. Business confidence improved on the margins in June with the HSBC Russia Manufacturing PMI edging up to 49.1 from 48.9 in May, and especially the services PMI improving to 49.8 from 46.1 in May. Demand for market services somewhat recovered in May: paid market services registered a 0.5 percent growth (y-o-y), compared to a 0.2 percent contraction in April and transport services improved to 1.3 percent (y-o-y) growth compared to a 0.6 percent contraction in April. However, retail trade continued its slowdown to 2.1 percent in May compared to 2.7 percent in April (and 3.5 percent in Q1 2014). Investment demand remained in negative territory, with fixed capital investment contracting 2.6 percent in May (y-o-y) compared to 2.7 percent in April and 3.8 percent in the first five months of 2014.
Inflation continued to climb in June, renewing the pressure on the 2014 inflation target of the Central Bank of Russia (CBR). The 12-months change in consumer price inflation rose to 7.8 percent in June from 7.6 percent in May with core inflation climbing unexpectedly from 7.0 to 7.5 percent. Food and services prices continued to drive up headline inflation by 0.7 and 0.9 percent respectively relative to May levels. Food prices remain driven by high sugar and meat prices (following the pork import ban from the EU at the beginning of the year and that of other meat products, recently from Moldova). Services prices owe their increase to some seasonal effects, such as tourism, but also fast climbing prices in housing, transport and insurance. Given the dwindling pass-through effect of a weaker currency some price stickiness and continued inflation expectations seem to prevail. Altogether, these trends will make CBR’s current 5 percent inflation target difficult to attain even with further tightening.
Pressure on the Ruble subsided due to increasing oil prices and a temporary ceasefire in Ukraine which lessened geopolitical tensions during parts of June. In June, the Ruble appreciated by 1.6 percent against the dual currency basket. Since May 12, the Ruble was traded in the interval of the currency band that does not require CBR’s interventions, and the regulator only conducted purchases of currency for replenishment of the Reserve Fund (US$1.5 billion in June). Purchases were suspended on June 24, when the total amount of purchases for the Reserve Fund this year reached US$5.7 billion, close to the initially planned amount of about US$6.1 billion. This released pressure on the Ruble as daily purchases equaled about US$100 million. International reserves increased in June by US$11.0 billion to US$478.3 billion, due to CBR currency purchases and euro/dollar exchange rate dynamics. Given easing pressure on the currency, CBR advanced with measures which are part of its commitment towards implementing a flexible exchange rate regime by end-2014: on June 17 it moved the operational band which does not require its interference from 3.1 to 5.1 rubles. The CBR reduced the amount of interventions in the zone 0.95 Ruble apart from the edges of the Ruble band from US$300 million to US$200 million. Also the CBR lowered cumulative amount of interventions required for shift of the Ruble band by 5 kopecks to US$1.0 billion from US$1.5 billion.
Credit growth slowed in May amidst increasing credit risks. In annual terms growth in the credit portfolio for both companies and households slowed: for firms to 17.5 percent (y-o-y, compared to 18.0 percent in April) and for households to 22.6 percent (y-o-y, compared to 24.6 percent in April). However, overall growth of banks’ credit portfolio remains high at 19.0 percent (y-o-y, compared with 19.9 percent in April). The risks to the quality of the credit portfolio increase as the capacity of borrowers to repay debt is negatively affected by slowing growth in income and economic activity. The share of non-performing loans (NPLs) by households continued to climb to 7.7 percent in May from 7.5 percent in April (and 6.5 percent in December 2013). The share of NPLs by firms also rose to 4.7 percent in May from 4.4 percent in April. Private deposits growth did not recover to pre-March levels (they dropped 2.0 percent in March). On an annual basis private deposit growth remained at around 10 percent in May, less than half compared to a year ago and December 2013. On a monthly basis, growth of private deposits also slid again into negative territory: minus 0.5 percent (compared to 1.7 percent growth in April). In June, CBR revoked licenses of five banks: two regional banks and three Moscow banks. None of them was in the top 300 banks according to its assets. Since January, thirty eight banks lost licensees, compared to thirty two banks for the entire previous year. In the beginning of June CBR also stopped the operations of ten Ukrainian banks in Crimea and Sevastopol. At the end of May, CBR decided to bail out the retail bank Mosoblbank—ranked the country's 83rd largest bank by assets—and two affiliated lenders. It is noteworthy, that rehabilitation was delegated to SMP bank (which is on the US sanctions list). It will receive a loan of 96.8 billion Rubles (US$2.8 billion) over 10 years at 0.5 percent interest from the Deposit Insurance Agency.
In January-May 2014 the federal budget surplus rose to 1.4 percent of GDP from 0.8 percent in the first five months of 2013. Federal budget revenue rose to 21.2 percent of GDP from 20.3 percent over the same period, as oil revenues increased by 1 percentage of GDP to 11.4 percent of GDP. Non-oil revenue remained little changed at 10.0 percent of GDP. Federal expenditure stood at end-May at 19.8 percent of GDP (compared to 19.6 percent of GDP in May 2013). On a year to year basis, federal expenditure execution was 1.2 percent of GDP lower for social policy expenses, health and education, while execution increased by the same amount for national security & defense, intergovernmental fiscal transfers, the national economy and state administration. On a monthly basis, the April deficit of 1.9 percent of GDP turned into a surplus of 5.6 percent of GDP in May. In May, federal revenues amounted to 19.2 percent of GDP compared to 21.2 percent in April, while expenditure execution stood at 13.7 percent (compared to 23.0 percent of GDP in April).
On June 30, President Putin signed into law the amendments to the 2014-2016 budget. Based on a new set of baseline macroeconomic assumptions—the key change being the revised GDP growth forecast for 2014 to 0.5 percent from 3.0 percent—the following budget parameters for 2014 are notable:
- Federal budget revenue is expected at 19.9 percent of GDP (up from the budgeted 18.5 percent);
- Federal budget oil revenue is projected at 10.5 percent of GDP (up from 8.9 percent), while non-oil revenue was revised down to 9.5 percent of GDP (from 9.6 percent);
- Nominal federal budget expenditure remain the same, but as a percentage of GDP federal budget expenditure are expected to increase to 19.5 percent of GDP (compared to 19.0 percent envisaged in the annual budget law);
- Additional expenditure for the Republic of Crimea and Sevastopol would not have any negative impact on total federal budget expenditure as it is planned to be executed through the reallocation of funds from some expenditure categories (e.g. support to national economy, assistance to SMEs and mono towns, labor market programs, and social support items);
- Given higher expected oil revenue and no changes to the expenditure side, the original federal budget deficit of 0.5 percent of GDP is projected to turn into a budget surplus of 0.4 percent, while the non-oil deficit would increase to 10.1 percent of GDP (from 9.4 percent);
- External borrowing by Government is projected to be reduced from US$71.9 billion to US$64.9 billion;
- Government plans to borrow less from the domestic market in light of higher revenues and the now expected budget surplus.
The amendments package was accompanied with substantial adjustment to key macroeconomic parameters and included three medium term scenarios for 2014-2017: a baseline scenario, an optimistic scenario and an additional scenario with an altogether lower projected oil prices.
Government approved two main initiatives which will provide support for off-budget investment financing with the goal to stimulate growth. First, Prime Minister Medvedev signed a resolution that raised the limit of National Welfare Fund (NWF) resource which can be used to finance domestic infrastructure projects to 60 percent, up from an earlier 40 percent. Forty percent of the total NWF fund (or 1.16 trillion Rubles as of January 1, 2014) can be used to implement such projects through Vnesheconombank (VEB), ten percent (or 290 billion Rubles) for projects implemented with the participation of the Russian Direct Investment Fund (RDIF) and another ten percent (or 290 billion Rubles) for projects implemented by the state corporation Rosatom. Second, a new mechanism for investment project financing allows Government to issue guarantees for loans of commercial banks (up to 25 percent of the value of the loan plus interest payments) to investors in strategic sectors of the economy. CBR will provide refinancing to such commercial bank in the amount not exceeding 20 bln Rubles per investor. Each loan shall not exceed 50 bln Rubles and the interest rate will equal the main policy rate plus one percentage point. The mechanism will be regulated by a commission headed by the Minister of Economic Development and specialists from the Ministry of Finance and CBR. Government is aiming for high value added, energy efficient, green growth and import substitution projects.
On July 3, the first Government meeting on the new 2015-2017 budget took place. Finance Minister Siluanov forecasts federal deficits of 0.4 percent of GDP for 2015 and 0.6 percent for 2016. Following consultations and Government approval, the draft budget for 2015-2017 will be submitted at the end of September to the State Duma, the parliament's lower house. The budget brought forward to 2015 from 2016 the sale of a 19.5 percent (around 423 billion Rubles) government stake in Rosneft, the oil company. About 100 billion Rubles will be spent on the development of Crimea in 2015, including for construction of a bridge across the Kerch Strait. Annual domestic borrowing is planned to increase to 1.0-1.1 trillion rubles in 2015-2017 (compared to 450 billion Rubles this year). The government is considering to give regions the option to introduce a sales tax of up to 3 percent (in addition to the VAT) to ease subnational budget pressures.
Rosstat published preliminary Q1 poverty statistics. According to Russia’s national poverty line, there was a slight increase in the number of poor people to 19.8 million from 19.6 million in Q1 2013 (both 13.8 percent of the population). According to our estimates, the seasonally adjusted poverty level in Q1 also increased compared to Q4 2013 and reached the average level of 2013.
Global growth is expected to increase in the second half of the year, following the weaker than expected activity in the first quarter. The global GDP forecast for 2014 is likely to be revised down after the latest release of the final estimate of the US Q1 growth, which showed a contraction by an annualized rate of 2.9 percent, significantly weaker than previously estimated. However, the weakness in the US Q1 growth is considered to be the result of temporary factors that delayed rather than derailed an anticipated acceleration in activity. Recent high-frequency data from the US show rebound in industrial production and continued firming activities. In contrast, recent indicators for Europe suggest some losing of momentum, with the average PMI weakening to 52.8 in June from 53.5 in May (although remaining above the 50 growth cut-off level). To bolster the slowing economic recovery and fight deflationary risks, the European Central Bank (ECB) announced in June an ambitious set of new easing measures aimed at encouraging banks to increase lending to businesses and discouraging hoarding liquidity at the ECB, putting downward pressures on long-term yields and the euro exchange rates. In Japan, the Bank of Japan maintained its aggressive monetary easing (increasing the monetary base by Y60-70tn—around $590-690bn—a year). For developing countries, the World Bank’s Global Economic Prospects (of June 10) expects growth acceleration to be supported by a US-led pick-up in high-income country growth and a significant easing of global financing conditions. However, in faster-growing regions (such as Sub-Saharan Africa and East Asia) supply-side constraints will limit the room for such acceleration, while economic rebalancing could slow growth in China.
Global financial markets have remained calm in light of country-specific risks, such as tension in Ukraine and Iraq and the possibility of a debt default by Argentina. External financing conditions for developing countries have been remarkably favorable in recent months, reflecting expectations of a more drawn-out period of monetary policy accommodation in high-income countries and some narrowing of external vulnerabilities. Gross capital flows to developing countries have continued on the recovering trend from the sharp dip in February. While flows have eased in May, they were 14 percent higher during the three months since February than during the three months that preceded the dip. Additional easing by the ECB, combined with prospects of modest growth and stable inflation in the US, helped flatten bond yields and volatility worldwide. Violence in Eastern Ukraine and the announcement of Argentina government of a possible payment default after the US Supreme Court ruling on June 16 sent CDS spreads for sovereign bonds of those two countries up by more than 150 basis points. CDS spreads on other countries’ sovereign bonds have remained stable. Many developing countries remain vulnerable to an increase in investor risk aversion because debt stocks are significantly above pre-crisis levels and fiscal deficits remain substantial, despite several years of robust growth.
The World Bank oil price forecast for 2014 was lifted to US$106/bbl from 103/bbl as oil prices soared to a 9-month high. The World Bank projection for 2015 now stands at US$104/bbl, up from US$100/bbl. Brent (the international marker) gained more than US$6/bbl from June 6 to 19 on fears of supply disruptions as forces of the Islamic State of Iraq and the Levant swept through many key towns in Northern Iraq. Added to this, concerns intensified around consequences of the escalating natural gas dispute between Russia and Ukraine. WTI (the mid-continent US indicator) made moderate gains as well. However, prices eased with fears of an Iraqi supply disruption (exports from the country have been uninterrupted during the conflict) and a cease-fire between pro-Russian militias and the government of Ukraine. A recovery of Libya's production provided additional cushion to oil markets. Additionally, a June ruling by the US Department of Commerce allows now exports of minimally processed oil (known as wellhead condensate oil) by two oil producers. Numerous analysts interpreted this as a first step towards relaxing a four-decade long US ban on oil exports. The ban—a response to the 1973 Arab oil embargo—applies to crude oil but not to refined products. Exports may begin as early as August, but are expected to be initially limited. However, they could reach one million barrels per day (mb/d) within a year (compared with the total US oil production of 8.4 mb/d in April 2014 and 5.5 mb/d in 2010). This could help reduce high US crude stocks (mostly held in Cushing, Oklahoma) and help narrow the WTI-Brent spread, which dropped below $7/bbl in early July after reaching $8.50/bbl in mid-June.
Compiled by a World Bank team under the guidance of Birgit Hansl, consisting of the following members (in alphabetical order): John Baffes, Olga Emelyanova, Mizuho Kida, Mikhail Matytsin, Stepan Titov, and Ekaterine Vashakmadze.
Last Updated: Jul 08, 2014
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