LoginSITREP. In this monthly, we present a situation report of Russia’s economic, political, business position as of mid‐year. Economic data shows weak growth. The leading growth indicator showed only 0.2% GDP growth in May. Some of this is a calendar effect, but growth for the first five months is running at 0.7% YoY.
Pressure builds. The early June temperature in Moscow was hot and the RTS Index finally recovered all of the loss incurred since mid-2014. That’s the good news. The list of bad, or worrying, news items is considerably longer. This time last year the government kicked off twelve months of public discontent with the pension age reforms but promised all would be better by mid-2019. It is not. The question now is whether the economy can be revived, and start to calm public concerns, or whether people are finally losing patience? If the former, then all will be well. If the latter, then we can expect more pressure on government and on its economic policies.
Economy retreats. The leading indicator was at 0.6% for March, down from the February level of 1.4%, and back at the level for January. Other indicators like consumer spending and real wages are stagnant, which seems to be cancelling out any benefits from higher oil prices.
Economy looks a bit better in February … The GDP leading indicator
was up 1.5%, a rebound from 0.7% in January. The manufacturing PMI
index was 52.8 in March, a surprise rebound from previous levels and
firmly in expansionary territory.
… leading to government optimism. First Deputy Prime Minister
Siluanov said that the economy performed much better than had been
expected in Q1. The Economy Ministry confirmed that if this positive
trend continues he will raise forecasts for this year and next in August.
Mueller exonerates Trump but not Russia. The report that Trump had
not criminally colluded with Russia in the 2016 election might help
Trump politically, but it is likely to renew the focus on Russia as a proxy
for Trump in US politics. Both the DETER and the DASKA acts are being
re-circulated in Congress. Secretary Pompeo informed Moscow that
CBW sanctions would be imposed in the near future. We think these
will not be highly damaging, but it depends on US politics.
Spring optimism from the CBR … The Governor of the Central Bank (CBR) appeared to signal the end of winter and the arrival of spring with much more dovish comments after last Friday’s policy meeting when compared to her very hawkish stance of last December. She said that inflation is likely to peak earlier and end the year lower than previously expected and this offers the possibility of a rate cut by year-end. Previously she said this would only happen in 2020.
A tough 1H in store. The mood in Russia is poor. Confidence indicators are weak for both consumers and companies and economic indicators are falling. GDP growth in 1H will be close to 1.0%, at best. Revised forecasts and scenarios. In this report, we revise some macro forecasts for 2019-21 and set out the different scenarios that may result in a worse or better result in the review period.
Optimistic EconMin. The Economy Ministry added more detail to its optimistic view of the economy in the 2025 to 2036 period. It expects unlikely without major reforms. So far, these are stalled.
Economy a little less gloomy. The leading indicator of economic activity showed growth of 2.5% in October, a strong improvement on previous months. The PMI manufacturing index also jumped sharply, so the softness of August and September may be temporary.
Sanctions reprieve, not a pardon. It is now most unlikely that Russia will face any major new sanctions from the US before year-end. Congress has more pressing priorities and the absence of any election interference allegations reduces the urgency. But key senators have made clear that there will be new legislation introduced in 2019 and they will press for more oligarchs and Russian enterprises to be added to the SDN list.
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.
2019 downgrades … Both the Economy Ministry and the Central Bank have cut their GDP forecasts and raised inflation expectations for 2019. But both see the dip as temporary and expect a much better performance from 2020.
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All Rights Reserved
