If everything is so good, then why does everything seem so bad?
2019 was one of the best years for the Russian economy in five years. International reserves rose by $65 billion. The federal budget will turn in a robust surplus, of around 2% GDP. The RUB has appreciated 10% ytd, and the local stock market is at record highs. The CBR cut 150 bps over the year, which translated into lower interest rates for businesses and households. So the question naturally arises: why don’t Russians feel optimistic?
The problem is that these successes haven’t affected the overall economic picture. Macroeconomic results are weak. We expect GDP growth in 2019 to be around 1.2%, even with stronger H2 results. Some rebound in H2 is largely connected to fiscal easing, as the government has finally started implementation of the national projects. In 2020, fiscal stimulus will continue, but will be smaller than in 2019.
Apart from fiscal stimulus, there are still no reasons for stronger growth. In September, investments in fixed capital increased only 0.7% y/y, although national projects are aimed at infrastructure development. We expect that investments will increase +1.5% in 2019, and +1.1% in 2020. Our analysis of capex programs of the largest Russian companies for the next year doesn’t provide much hope for stronger results.
A major problem with the Russian economy is that it seems stuck at structurally low growth rates. The government tries to stimulate the easiest part of the production function: capital. But there are other fundamental problems. In this report, we highlight the decreased level of technological transfer, and increased economic inequality.
We believe 2020 will be similar to 2017 or 2019, with relatively high oil prices, economic stability and anemic growth. Inflation will likely rise to 2.5% in Q1. We expect the CBR to take a break at its next meeting, and to likely then continue to cut, with one more cut in Q1 2020. Allowing rates to fall below 6% means that the CBR needs to reconsider its real natural rate estimates. Our end 2020 forecast for the key interest rate is 5.75%.
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