Macro Monthly October 2018: Is Russia in the eye of a storm or preparing for a new growth phase?

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Waiting for sanctions updates. There is a sense of being in the eye of the storm with regard to sanctions. After the frenzy in August and early September, the situation is now calm. But activity will pick up in November, in the aftermath of the mid-term elections and ahead of the Phase II CBW sanctions decision. We update the current position and highlight some conflicting indicators in this report.

Government approves stimulus package. Businesses and investors are waiting to see some flesh on the bones of the spending and reform promises made by Putin after the elections. Total spending on the national projects should be about RUB13 trillion (about US$196 billion) or about 14% of Russia’s 2017 GDP. The focus will be on access to medicines, infrastructure and digital government.

Economy grows slowly. The leading GDP indicator fell from 1.8% to 1% in September. The Market PMI rose for both manufacturing and services, giving hope that the recent weakness was a very short-term cycle, but generally growth is weak. The Q3 consumer confidence indicator fell 11 percentage points.

Oil rise boosts finances. Oil continues to rise ahead of the toughing of Iran sanctions. Traders are betting on US$100 Brent this winter. Russia earned US$170 bln from exporting oil and gas in 8M18 and is on course for a full year budget surplus of US$25-US$30 billion.

Inflation above 3%. The Central Bank’s fears are being realized, and inflation is creeping up. The harvest is shaping up to be poor and food prices are up, and the last devaluation has still to be felt in the statistics. Nonetheless, it is expected that the CBR will hold rates steady at their meeting on 26 October.

Minor unrest at September elections. Four out of the 22 elections for governor on 9 September ended in chaos, as the official candidate failed to get through. There were some protests, which were likely caused by pension reforms. But a survey by Levada reports that the number of those willing to take part in further protests dropped to 35% in September, from 53% in August.

Trust in Putin falls to a low. Only 39% of those polled named President Putin as a politician they trusted, the lowest ever reported. This is clearly a consequence of the pension reforms, but in general the Administration will think that they got away with this one.

Equities get a lift. Equities had a rare boost in September from the combination of rising oil, ruble strength and no new sanctions news. Clearly, sentiment is very sensitive to fresh sanctions events.