Russian macro forecast: emphasis on inflation and rates as growth returned and “booster” sanctions offered
Rosstat reported that 2Q21 GDP was up by 4.3% y-o-y, implying that the economic growth could vary between 4.6% and 4.7% in 9М21, which is in line with our previous 2021 GDP growth forecast, which ranged from 4.2% to 4.3%. In 2022 GDP growth will naturally decelerate.
What has changed significantly since our previous forecast is the persistently high inflation, mainly caused by massive budgetary spending, which started to grow in September. The budget was formally amended in the months that followed. Spending will remain high in December, but is expected to normalize in January. Unsurprisingly, the CBR's efforts to contain inflation by hiking the key rate have had little effect given the massive direct liquidity injections from the federal budget.
Higher inflation increases Russia’s nominal GDP, but the budgetary stimulus that spurred inflation did little to boost real economic growth. Therefore, this stimulus could be considered excessive in Russia. Overall, despite several shortcomings in economic policy and permanent offers of "booster" doses of sanctions, Russia’s economic situation looks reasonably stable.
* The sooner the government decides to refrain from throwing in extra money in a very uneven fashion, as usually happens, the lower inflation will be going forward. So far, next year's budgetary spending is not going to rise, at least until 2H22, i.e., when the government might once again amend expenditures. Hence disinflation is likely to take place already in 1Q22.
* Therefore, the CBR will face a dilemma during its BoD meeting on December 17 – either to raise the key rate again high enough to bring it close to y-o-y inflation, or just to make a symbolic move, i.e., to raise it only a little bit. The latter cannot be ruled out as Rosstat also reported that w-o-w inflation suddenly fell to 0.07% during the seven days ending December 5 - a sharp swing from the much higher inflation recorded the week before.
* The overall impact of higher rates on Russia’s economy will be rather limited in 2022. The expected deceleration of Russia’s growth looks natural as the economy returns to its more moderate and balanced growth trajectory and the budgetary stimulus associated with the pandemic gradually eases.
* The Russian economy is not highly leveraged. Total household debt to banks accounts for some 20% of GDP. Corporate debt is higher, but borrowing is not essential. Russia depends neither on foreign banks nor on foreign investors – one of the effects of nearly eight years of sanctions.
* Household consumption and investment in production capacity are expected to decelerate in 2022 amid evaporating base effects, but the latter’s growth rate will be higher.
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