World Economy

Russia Growth Contracted in H2

Stabilization of inflation processes and the high level of credit quality of Russian borrowers attract foreign investors to the country
Boosting Russia’s growth will be possible only with deep structural reforms.Boosting Russia’s growth will be possible only with deep structural reforms.

The Russian economy grew by 1.5% last year, recovering from losses in previous years, but the growth was less than expected, preliminary Federal Statistics Service data published on Thursday showed.

Russia's oil-dependent economy was on the mend in 2017 after two years of recession, triggered by a sharp drop in global commodity prices and sanctions imposed by western countries against Moscow for its role in the Ukrainian crisis.

A Reuters poll of analysts and economists expected growth of 1.7% last year and 1.9% in 2018. Russian gross domestic product contracted by 0.2% in 2016. The economy ministry had expected growth of 2% or more in 2017. But the economy unexpectedly contracted in November, hit by a drop in industrial production, which fell 3.6% compared with a year earlier.

The economy ministry attributed the drop to warm weather which depressed demand for natural gas and by the deal on a global oil production cut, led by Russia and Saudi Arabia.

"The annual growth figure masks what was a year of two halves for Russia's economy. Growth gathered pace in the first half of 2017, hitting a peak of 2.5%, y/y, in Q2. But it subsequently slowed," analysts at Capital Economics said in a note.

"We think some of the factors that dragged growth down in the second half of 2017—including lower oil production and weakness in parts of the manufacturing sector—will fade this year," they said, expecting growth this year of 2.5%.

Room for Monetary Easing

A further cut in the key rate is expected in 2018. President Vladimir Putin, in power since 2000, is widely expected to win another term in a March 18 election.

Central Bank Governor Elvira Nabiullina said on Thursday there was room for further monetary policy easing, adding that the rate could be either cut or put on hold at a Feb. 9 board meeting. "The key rate may end 2018 near 6.5-6.75% depending on the speed of the consumer price index recovery and post-elections economic agenda," ING bank said.

Analysts and economists polled by Reuters in late January said they expected a small rate cut at the next meeting, from the current 7.75%.

Needs Deep Structural Reforms

Boosting Russia’s growth will be possible only with deep structural reforms. With unemployment at around 5.5% for the fifth consecutive year–a rate that almost any developed country would envy–there are few unemployed to be put to work. Likewise, capacity utilization in manufacturing is roughly at the same level as in the previous two peaks (2007-2008 and 2013), meaning that there is almost no spare capacity to be put to use.

Recognizing that active monetary policy cannot help under such circumstances, the central bank, instead, brought inflation down to 2.5% in 2017, the lowest level in the 25 years of Russian capitalism. Save for a constantly increasing oil price–an unlikely prospect–the only possible source of growth in Russia is productivity. And that would demand significant reform. One such reform would be to expand access for foreign investors.

Attracting Investors

Stabilization of inflation processes in Russia and the high level of credit quality of Russian borrowers attract foreign investors to the country, CEO of the Russian Analytical Credit Rating Agency Ekaterina Trofimova told Tass on Thursday.

"I would highlight the change in the situation with inflation and the stable transition of real interest rates to the positive zone for the first time in the current history of Russian financial market as the main reason of interest appearing among foreign investors. The situation when interest rates are above current and forecast inflation is highly attractive from the financial standpoint.

From this viewpoint, the level of real interest rates in Russia is one of the highest across the globe with the highest stability levels of the credit quality of Russia borrowers," Trofimova said.

"A huge deficit of high quality and high-return assets exists in the global financial system, especially adjusted by inflation, and Russian assets represent high interest, which is certainly restricted by uncertainty with sanctions. We see until now that approximately a third of investments, particularly into the Russian federal loan bonds are real foreign funds," she noted.

The Russian economy has managed to adapt to western sanctions and their impact on it will be minimal over the longer term, the expert added.


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