Recent Economic Developments
The economy has continued to grow at a moderate pace in 2018, supported by a pickup in global growth, firmer oil prices, and a strong macro policy framework (a flexible exchange rate regime, inflation targeting, and a new fiscal rule). Consumer price inflation remains relatively low at an annual rate of 3.1% in August 2018.
Capitalization of Russia’s banking sector (12.2%) exceeds the regulatory minimum of 8%, but the share of nonperforming loans (10.9% of total loans in July 2018) remains high. The lending activity has continued to recover.
Banking sector consolidation has deepened, supported by a clean-up of the sector by the Central Bank of Russia (CBR), a transition to the proportionate regulation of banks, and the introduction of a new bank resolution mechanism.
Higher oil prices, improved tax administration, a weaker ruble, and a conservative fiscal policy turned the budget balance into surplus in 2018 (2.5% of GDP in the first seven months of 2018).
The Government plans to increase spending on education, health, and infrastructure starting in 2019. To accommodate higher spending, the Government will mobilize revenue (including by increasing the value-added tax [VAT] rate and completing a tax maneuver in the oil sector) and plans to temporarily relax the fiscal rule. Instead of targeting a zero-federal budget primary deficit at the benchmark oil price (US$40 per barrel in 2017 prices), the fiscal rule would target a 0.5% of GDP federal budget primary deficit.
Unemployment declined further to 4.7% in July 2018 compared to 5.1% in July 2017, while real wages and pensions increased on the back of low inflation. Real disposable income growth has rebounded since the beginning of 2018 and totaled 2.6% year-on-year in January–July 2018. The poverty rate, using the national definition (the share of the population with income per capita below the subsistence level of 10,088 rubles per month in 2017), decreased marginally from 13.3% in 2016 to 13.2% in 2017.
Relatively high oil prices (averaging US$70 per barrel) continued the momentum in global economic growth, and macro stabilization is expected to support growth in the medium term. However, the forecast of real GDP growth rates of 1.6%, 1.3%, and 1.7% in 2018, 2019, and 2020, respectively, are relatively low due to Russia’s slowing potential growth.
Government initiatives to raise the retirement age and increase spending on education, health, and infrastructure could lift potential growth. In addition to announced reforms, the substantial strengthening of market institutions to enhance competition between firms is of paramount importance.
Downside risks mostly emanate from external sources because of a possible expansion of sanctions, heightened global trade tensions, and the volatility of financial markets.
The moderate poverty rate (the share of the population living on less than US$5.5 per day [2011)] is expected to continue to decline in 2018 and throughout 2019. A rebound in the economy, wage growth in the private sector, and the indexation of pensions to inflation will support disposable incomes and contribute to a gradual decline in the poverty rate.
However, many individuals lack formal employment and many households remain close to the poverty line, suggesting a level of social vulnerability that will continue to require close monitoring.
Last Updated: Oct 11, 2018