Will 2018 prove to be a turning point? – February 2018


2017 growth at 1.5%. Rosstat estimates last year’s GDP growth at 1.5%. A weakening industrial production trend was offset by stronger growth in agriculture and a recovery in retail sales. VEB estimates Q4 growth at 0.6%, down from +1.8% in Q3 and 2.5% in Q2.

2018 should be better. We forecast growth in 2018 at 1.8%, rising to 2.0% in 2019. The key factor will be the strength of consumer activity and whether the government will boost budget spending, should the average oil price stay above US$60/bbl, later in the year.

Final transition year? The government has spent the past two years preparing to shift the economy from hydrocarbon dependency to a more diversified model capable of more sustainable growth. The big question for 2018 is whether the expected policy and personnel changes will be put in place and how effectively?

Inflation is low but will rise. The headline inflation rate ended January 2018 at 2.2%. The rate will inevitably rise during this year.

CBR cuts rates but stays cautious. The CBR cut the key rate another 25 bps on 9 February (to 7.5%) and, while indicating it will cut further this year, it continues to highlight potential risks. The lower inflation rate should allow for another 110-bps cut by the year-end.

Oil will be key. The budget assumes US$41/bbl (Urals) this year and, at that level, a deficit of RUB1.27 tln (US$22 bln). The breakeven price, assuming no spending hikes, is US$57/bbl.

Ruble holds stable. The fiscal rule is working well. The ruble has remained stable against the euro and has marginally gained against the dollar, even as the oil price has climbed 50% since last summer.

Tax changes may be delayed. It is reported that while the Finance Ministry is expected to publish the proposals for tax changes in April, any actual changes may not happen until 2019.

Sanctions. The section 241 and 242 reports were issued but in way that suggests neither will be acted on. However, the threat is far from over, as the US Treasury Secretary said there may be further actions and reports are circulating about a classified list.

Election. There is little new election news and no surprises are anticipated. President Putin continues to delay the Federal Assembly Address, fueling speculation about the reasons for this.

Capital markets. Russia’s equity indices spiked by more than 10% in January, although volumes remained low. The valuations are cheap and investors are hopeful that the recovering economy plus the weak sanctions reports, may create a more favorable backdrop in 2018.

Moody’s upgrades. Rating agency Moody’s upgraded Russia’s outlook to positive and said it should return the investment grade rating this year. It upgraded Gazprom, Russian Railways and several other state companies to investment grade.