Russia Monthly Economic Developments February2020 Global activity indicators suggest that growth remained weak in 19Q4, with global industrial production registering a tepid 0.9 percent (q/q saar). Oil prices fell sharply in mid-January 2020, remaining low in February following reports that the coronavirus outbreak had worsened. In January, the ruble continued strengthening, outperforming other EMDE currencies. Russia’s current account surplus shrank in January compared to the same period in 2019, while the trade balance surplus remained almost unchanged. In annual terms, industrial production growth accelerated to 2.1 percent, y/y, in December 2019 compared to 0.3 percent, y/y, in November. In January 2020, annual inflation rate dropped to 2.4 percent, down from 3 percent in the previous month. On February 7, 2020, the Bank of Russia cut the key rate by 25 bp to 6 percent in annual terms on the back of continued consumer price index (CPI) deceleration. The unemployment rate stayed unchanged. In 2019, on the back of lower tax revenues, the federal budget registered a surplus of 1.8 percent of GDP (cash basis), down from 2.6 percent of GDP in 2018. Both retail and corporate sector lending slowed down, though unsecured consumer loans continued growing at double digit rates. Key credit risk and performance indicators remained stable. On February 11, 2020, the CBR agreed to sell its full stake (50 % +1 share) in Sberbank to the Government (Ministry of Finance) for a market price. The Global Context Oil prices fell sharply in mid-January and Global activity indicators suggest that remained lower in February following growth remained weak in 19Q4, with reports that the coronavirus outbreak had global industrial production registering a worsened. Since January 20th (the date tepid 0.6 percent (q/q saar). Survey data in when Chinese authorites confirmed January, however, pointed to a tentative occurance of human-to-human recovery, with both the PMI manufacturing transmission of the virus), the price of Brent and new export orders rising on the back of improved crude oil has fallen 12 percent to US$57/bbl, while that trade relations between the United States and China. The of WTI is down 11 percent to US$52/bbl (Figure 1). The outbreak of a novel coronavirus (COVID-19), which fall in prices reflects concerns that the originated in Hubei Province in China, has infected over virus will substantially reduce air travel and shipping, 80,000 people and killed over 2,500 globally. However, particularly in China, which is the world’s largest most cases have been on China’s mainland. The outbreak importer and second largest consumer of oil. Forecasts could dampen global activity in 20Q1 as spillovers from for oil demand in 2020 have been revised down China transmit through trade, financial, and accordingly, with the International Energy Agency commodities channels, with the latter reflecting China’s lowering its forecast by 365 thousand barrels per large role in global commodity markets. In response to day (kb/d) to 825 kb/d, which would be the weakest the weak external environment or the virus, many EMDE increase since 2011. The U.S. Energy Information central banks have further eased monetary policy, with Administration reduced its forecasts by around 300 kb/d some governments also providing fiscal support. Despite to 1 million barrels per day. As a result of the fall in the outbreak, equity prices in advanced economies rose prices, OPEC and its allies have indicated that they may in early February, but these gains have reversed cut production further, with OPEC’s technical committee somewhat following the spread of the virus outside of recommending a further reduction of 600 kb/d for the Asia. first half of 2020. Any decision will likely be formalized at the group’s meeting in early March. 1 Figure 1: Oil prices fell sharply in mid-January and Figure 2: In January, the ruble continued to strengthen remained lower in February with respect to the U.S. dollar Russia’s current account surplus weakened in January Recent economic developments 2020 compared to the same period in the previous year, In January, the ruble continued strengthening, while the trade balance surplus remained almost outperforming other EMDE currencies (Figure 2). It unchanged. In January 2020, the current account surplus gained 2.4 percent with respect to the U.S. dollar decreased to US$9.5 billion from US$10.2 billion in the compared to 2.0 percent in December 2019. This was on same period last year. The trade balance surplus the back of sustained interest of foreign investors in registered at US$14.6 billion compared to US$14.4 billion Russia’s assets and local tax payments. The official in January 2019. Net private capital outflows narrowed exchange rate initially strengthened from 61.9 Rub/USD to US$7.3 billion compared to US$9.3 billion in the as of January 1st to 61.8 Rub/USD on January 25th, after previous year. Net capital outflow stemmed mainly from which it weakened, reaching 63 Rub/USD on January 31st. the banking sector which ramped up net foreign assets This is in part explained by oil price dynamics and and cut back on net foreign liabilities. Russia’s reactions to the risks posed by the coronavirus outbreak international reserves gained US$7.1 billion in January in China. Meanwhile, negative dynamics were registered compared to US$1.9 billion in the same period last year, for other emerging market currencies as the MSCI largely due to foreign currency purchases in the domestic International Emerging Market Currency Index declined market, in line with the fiscal rule. by 1.1 percent in January following a 2.1 percent rise in the previous month, in part reflecting the expected In annual terms, in December 2019, industrial slowdown triggered by the coronavirus outbreak. This production growth accelerated to 2.1 percent, y/y, decrease follows a sharp decline in commodity future compared to 0.3 percent, y/y, in November. Industrial prices as indicated by the Thomson production output growth strengthened in December Reuters/CoreCommodity CRB Commodity Index. (+0.2 percent, m/m, sa) in line with higher growth in manufacturing (3.4 percent, y/y, compared to 0.1 percent, y/y, in November). In particular, accelerated growth in production of food and metallurgical products contributed to the manufacturing growth. Meanwhile, growth in mineral resource extraction accelerated to 1.8 percent in December, y/y, from 1,4 percent, y/y, in 2 November. Construction growth moderately On February 7, 2020, the Bank of Russia cut the key strengthened, registering 0.4 percent, y/y, in December rate by 25 bp to 6 percent in annual terms. The main compared to 0.3 percent, y/y, in November. reason for this decision was continued CPI deceleration and a decline in inflation expectations. In January 2020, Figure 3: Industrial production output growth households’ inflation expectations decreased to 8.3 accelerated in December percent, down from 9 percent registered in December. However, inflation expectations remain elevated. Disinflationary risks still exceed pro-inflationary risks over the short-term horizon. The Central Bank noted possible further rate cuts at its upcoming meetings. Labour market dynamics were stable in December 2019. The unemployment rate stayed at the level of 4.6 percent – the same as the previous month – and the seasonally adjusted rate also remained unchanged at 4.5 percent (Figure 5). Information on real wages is now being published with a one-month lag. In November 2019, this indicator increased by 2.7 percent compared In January 2020, annual inflation rate dropped to 2.4 percent, down from 3 percent in December (Figure 4). to the same period in 2018. The decrease in headline CPI was largely due to the 12- Figure 5: In December 2019, the unemployment rate month services CPI deceleration (2.8 percent, y/y, (sa) remained unchanged from the previous month compared to 3.8 percent in December) and the continuous deceleration in the 12-month food inflation (2 percent, y/y, compared to 2.6 percent in December). Core CPI dropped to 2.7 percent in January, down from 3.1 percent in December. The slowdown happened from a high base of January 2019 which was pushed up by the VAT rate increase. Yet core inflation growth on a m-o-m basis did not show signs of increasing inflation pressures. Figure 4: Consumer price inflation slowed down further at the early 2020 In 2019, on the back of lower tax revenues, the federal budget registered a surplus of 1.8 percent of GDP (cash basis), down from 2.6 percent of GDP in 2018. In 2019, oil/gas revenues dropped by 1.4 percent of GDP to 7.3 percent of GDP due to lower oil prices and tax manoeuvre in the oil sector. Non-oil/gas revenues grew by 1.2 percent of GDP, reaching 11.2 percent of GDP; this was supported by an increase of the VAT tax rate and a weaker ruble in the first half of 2019, which positively 3 affected corporate income tax, VAT, and import duties reached 2.1 percent and 18.8 percent, respectively, receipts. Non-tax revenues increased by 0.3 percent of compared to 1.5 percent and 13.8 percent, respectively, GDP compared to 2018, partly due to higher dividends in the beginning of the year. from Gazprom, Rosneft, and Transnet. Non-interest Figure 6: Key credit risk and banking performance federal budget expenditures grew by 0.7 percent of GDP indicators remained stable in November mainly on the back of higher spending under categories including national economy (+0.3 percent of GDP), health (+0.2 percent of GDP), housing and communal services (+0.2 percent of GDP), and education (+0.1 percent of GDP). Supported by higher non-oil/gas revenues, the non-oil/gas primary federal budget deficit shrank to 4.8 percent of GDP, down from 5.3 percent of GDP last year. In 2019, federal government debt grew to 12.4 percent of GDP, up from 11.8 percent of GDP, of which external debt increased by 1 percent of GDP to 3.9 percent. This was spurred by non-residents purchasing government bonds. As of January 1, 2020, the National Welfare Fund (NWF) stood at US$125.6 billion (7.1 percent of GDP) compared to US$58.1 billion at the beginning of 2019. The CBR continues to remove insolvent banks. As of January 1, 2020, there were 442 banks compared to 484 In 2019, both retail and corporate sector lending slowed at the beginning of 2019. down although unsecured consumer loans continued On February 11, 2020, the CBR agreed to sell its full growing at double digit rates. Credit to households in stake (50 % +1 share) in Sberbank to the Government rubles grew by 18.6 percent in 2019 compared to 22.8 (Ministry of Finance) for a market price. According to percent in 2018. The unsecured consumer lending (UCL) preliminary information, the actual sale price will be slightly moderated as the CBR’s regulatory measures determined based on the weighted average price of started taking effect. In the first eleven months of 2019, Sberbank shares for the six months preceding the first the UCL grew by 20.1 percent versus 21.8 percent in the day of sale. Currently, the market value of the CBR shares same period of 2018. Credit to the corporate sector, after is about RUB2.7 trillion (US$43.6 billion). CBR equity adjusting for foreign currency (FX) changes, grew at a stake at Sberbank is not marked at market price. As of weaker rate in 2019 than the previous year (4.5 percent 2018, its booked value stood at just RUB72.9 billion on in 2019 versus 5.8 percent in 2018). This weak growth the CBR's balance sheet.Thus, the CBR stands to make a reflects soft corporate demand for credit, constrained by profit from this sale (of about RUB2 trillion). This sale will low economic growth. resolve the regulator–owner conflict of interest of the Key credit risk and performance indicators remained CBR holding a majority stake in Russia’s biggest bank. The stable (Figure 6). As of December 1, 2019, the capital proceeds from this sale would be transferred to the adequacy ratio increased to 12.4 percent from 12.3 federal budget as CBR’s profit (75 percent per law) and percent a month prior (against a regulatory minimum of will finance additional social support programs 8 percent). Non-performing loans slightly declined, announced by the President in January. Currently, reaching 9.6 percent. In 2019, the banking sector’s profit additional social spending is estimated at 4 trillion rubles; amounted to RUB 2 trillion (US$31.5 billion) compared to about US$63 billion (or 3.5% of GDP) in 2020 – 2024. The RUB 1.3 trillion (US$21.5 billion) in 2018. As of December sale will be conducted in instalments, to be completed by 1st, Return on assets (ROA) and return on equity (ROE) 2021. To finance the purchase, the Ministry of Finance 4 will tap into the liquid part of the National Welfare Fund in an amount exceeding 7 percent of GDP. The CBR is to sell FX currency from the NWF so that the government will invest in rubles in Sberbank shares. The CBR plans to gradually sell FX currency in the market over 3 to 7 years; thus, the effect on the exchange rate will be limited. Meanwhile, the fact that US$43.6 billion of the NWF will be invested in domestic assets goes against its savings and stabilization objective. Also, a large part of additional social expenditures is recurrent and is likely to require more sustainable ways of being funded (such as through tax increases or efficiency savings rather than via this one-off arrangement). In its analytical work, the World Bank uses official statistics of the Russian Federation. 5 By relying on these data, the World Bank does not intend to make any judgment on the legal or other status of the territories concerned or to prejudice the final determination of the parties' claims.