Russia Macro Monthly: Pension Reform and its Discontents – July 2018


Russia hosts good World Cup. Despite our headline in the June Monthly, Russia’s football team exceeded all expectations. The hosting of the event also confounded critics. However, optimism that this may lead to reform acceleration or, e.g. a much easier tourist regime, and thus boost tourism, is unfounded at this stage.Pensions reform backlash. Opinion polls show a large majority of Russians are unhappy with the proposal to raise the retirement age. Putin is likely to wait until the extent of public feeling can better be gauged in the autumn before making a final decision. He has never pushed a genuinely unpopular reform because of the instability risk.

No major breakthrough at Helsinki summit. The main achievement of the Trump-Putin summit is that it has actually taken place. The event has received instant and persistent criticism from Congress. The main risk for Russia is that Congress now more aggressively pushed anti-Russia sanctions.

Significant comment about Nord Stream 2. President Trump was less critical about Nord Stream 2 in his post-summit comments. He still sees it as bad for the EU but shifted his rhetoric to saying US producers will have to (be able to) compete with Russia in Europe.

Counter sanctions bill. The Duma speaker said that the bill to criminalize sanctions compliance would be watered down to make compliance a civil offense. It also seems likely that it will be pushed back to the Duma’s autumn session, allowing for further changes.

Signs of weakening growth. The PMI and confidence data point to growth having already peaked. The government’s leading indicators showed growth at 2.1% in May. Industrial growth is at 3.7%, mainly driven by raw materials.

EconMin revises forecasts. The Economy Ministry expects growth at 1.9% this year but only 1.4% for next year. The VAT increase is the main reason for the drop. It expects real wage growth will only be 1% in 2019, from over 6% growth this year.

Hawkish CBR sees inflation risks. The CBR did not touch the key rate in June because it expects higher inflation later this year and into 2019.

Siluanov says budget rule stays. Finance Minister Siluanov said that the budget rule will not be relaxed. He says it is the main reason why the ruble is stable and keeping it stable is the key priority.

Oil price volatility. The price of oil remains volatile as traders weigh up the likely effect of the new Russia-OPEC deal and the other major events in the oil sector. Russian production is rising.

Bigger oil tax take. The government has sent a bill to the Duma to revise taxes in the oil sector with the aim of taking an additional US$58 bln in taxes over six years.