Russia Monthly Economic Developments August 2020 Globally, the number of confirmed COVID-19 cases now exceeds 20 million, with more than 750,000 deaths. Despite the continuing spread of the virus, recent data suggest that global activity is slowly firming from its low base. The composite PMI returned to expansion in July, rising to 50.8, above its trough of 26.2 in April. Crude oil prices also continued to increase, rising by 7 percent in July and 30 percent in June. The recovery in the oil market has been supported by a modest recovery in demand and production restraint, particularly among OPEC+ countries. In July, despite a continued increase in oil prices, the ruble weakened by 3.0 percent, m/m, against the U.S. dollar. Russia’s GDP contracted less than expected, by 8.5 percent, y/y, in the second quarter of 2020. In July, headline inflation accelerated, with the consumer priсe index (CPI) rising by 3.4 percent, compared to 3.2 percent increase in June, partly due to the base effect in food inflation. On June 19th and July 24th, the CBR cut the key policy rate by 100 and 25 basis points, respectively, to a record low of 4.25 percent. Labor market dynamics deteriorated in June, with unemployment increasing to 6.4 percent, sa, up from 6.2 percent in May. In the second quarter of 2020, real disposable incomes decreased significantly, by 8 percent, y/y, compared to 1.2 percent growth, y/y, in the first quarter. On the back of higher spending and lower oil/gas revenues, in the first seven months of 2020, the federal budget registered a deficit of Rub1,519.6 billion, compared to a surplus of Rub2,028 billion in the same period last year. After a slowdown in April - May, credit growth accelerated in June. On the back of the gradual stabilization of the economic situation, the demand from borrowers, both households and corporates, for restructuring of their loans, as well as for payment holidays, showed signs of decreasing. The Global Context quarter of 2020, global equity markets posted one of the largest quarterly gains on The number of globally confirmed cases of record in the second quarter of 2020, COVID-19 now exceeds 20 million, with fuelled by central bank easing and the more than 750,000 deaths. New cases are gradual reopening of some economies accumulating at a rate of more than 250,000 following lockdowns. More recently, per day, with particular concentrations in continuing COVID-19 outbreaks in many the United States, India, Brazil, Columbia, countries have led to falling valuations in the sectors South Africa, and Mexico. Despite the continuing spread most closely linked to reopening such as travel and of the virus, recent data suggests that global activity is energy. Improving investor sentiment and central bank slowly firming from its low base. The composite PMI support have contributed to an easing in emerging returned to expansion in July, rising to 50.8, above its markets and developing economies’ (EMDE) financing trough of 26.2 in April. The contraction in the Sentix conditions since March. Similarly, EMDE borrowing costs global economic sentiment index eased in August to -9.7, have trended down after reaching their highest level up from its trough of -32.2 in April. Meanwhile, global since the global financial crisis in March; however, the trade fell 17.7 percent, y/y, in May. The composite new emerging markets bond index (EMBI) spread remains export orders PMI rose to 46.4 in July, still below 50 but 110 basis points higher than at the start of the year. well above its trough of 25.9 in April. While a few countries saw modest upticks in tourism in June, in most Crude oil prices continued to increase, rising by 7 places, international tourist arrivals were down by an percent in July following a 30 percent jump in June. average of 90 percent, y/y. The number of global Brent crude oil averaged US$42.8/bbl in July, more than commercial flights doubled between April and June but 80 percent higher than its trough in April. The recovery has plateaued since July at about 60 percent of its pre- in the oil market has been supported by a modest crisis level. Following substantial losses in the first recovery in demand as well as production restraint, 1 particularly among OPEC+ countries. China’s oil demand dynamics was contrary to the dynamics registered for rose by 750 thousand barrels per day in June, while other emerging market currencies as the MSCI demand in Europe has also been recovering as lockdown International Emerging Market Currency Index measures are eased. However, in its August Oil Market strengthened by 0.7 percent in July. Investors became Outlook report, the International Energy Agency (IEA) more cautious about the ruble in late July as geopolitical revised down its forecast for oil demand in 2020 and risks somewhat increased due to tensions between 2021 citing the ongoing high number of new COVID-19 Russia and Belarus. Discussions of possible new sanctions cases, as well as continued weakness in the aviation against Russia in the U.S. Congress were an additional sector, which is expected to persist into next year (Figure risk factor. Possible increase in imports amidst less 1). In addition, production is likely to rise in the second restrictive mobility measures could have also weighed on half of 2020 as the OPEC+ cuts taper, and production in the ruble in July. Increased geopolitical risks related to the United States and Canada has started to see a the mass protests following the elections in Belarus modest recovery amid higher prices. appear to have had a marginal additional effect on the ruble so far: as of August 19th, the ruble exchange rate Figure 1: The IEA revised down its forecast for oil remained unchanged compared to the end of July. demand in 2020 and 2021 Figure 2: In July, the ruble weakened by 3 percent against the U.S. dollar Recent economic developments The daily number of COVID-19 cases in Russia has Due to a weaker trade balance resulting from the gradually decreased since the end of June 2020. As of COVID-19 pandemic, Russia’s current account surplus August 19th, Russia had registered 937,321 cases almost halved in the first six months of 2020, down to (15,989 deaths). In terms of the number of cases, Russia US$22.3 billion compared to US$43.4 billion in the same now ranks fourth in the world (after the USA, Brazil, and period last year. In the January - June 2020 period, the India). The Russian Government and the Central Bank trade balance surplus was US$46.3 billion compared to continued to expand and refine their support measures US$86.4 billion in the first half of 2019, and this was to counter the socio-economic impacts of the COVID-19 mostly due to a fall in energy exports on the back of pandemic and to lay a foundation for the recovery phase. lower prices and volumes. Energy exports value dropped In July, despite the continued rise in oil prices, the ruble by about 35.2 percent (-US$42.7 billion) as the spread of weakened by 3.0 percent, m/m, against the U.S. dollar the pandemic negatively affected global demand. (Figure 2). Continued FX sales in the fiscal rule Natural gas exports registered the largest drop, declining framework supported the ruble. Ruble exchange rate by about 55 percent. Volumes of natural gas exports 2 diminished by 23.3 percent, y/y, in the January - May wholesale trade, industrial production, and 2020 period. While oil prices slumped by 39.5 percent in transportation, which were hit by lower demand and the January - June period, crude oil exports decreased by measures aimed at limiting the spread of the pandemic, 36 percent as some contracts for deliveries were signed dragged the economy down (Figure 3). A drop in in advance. Imports of goods dropped by 8 percent, construction, which was largely exempted from supporting the trade balance. A stronger balance of quarantine requirements, appeared to moderate in the services (with a steep drop in imports outweighing a second quarter, at -1.7 percent, y/y, as compared to 1.1 decline in exports of services) and a stronger investment percent, y/y, in the first quarter. The slowdown in the income account also supported the current account. Net financial sector, not reported in the high frequency capital outflows in the private sector increased to indicators, could have been less severe given the US$28.7 billion, up from US$23.3 billion in the same continued credit growth in the second quarter in annual period last year. Banks continued to pay off debt amidst terms. Economic activity in Russia seems to have passed economic sanctions and reduced acquisition of net its bottom point in June. High frequency indicators foreign assets. Amidst elevated uncertainty and lower (electricity consumption, financial flows) reveal that the reinvestment of profits, the increase in net capital Russian economy has entered the path of a gradual outflows was entirely due to the non-banking sector, rebound, supported mainly by domestic demand. In July, with incoming net FDI turning negative in the first industrial production output increased by 1.5 percent, quarter of 2020 compared to the US$10.3 billion inflows m-o-m, sa. PMI in services rose to 58.5 from 47.8 in June. in the same period last year. International reserves PMI in manufacturing registered 48.4 and 49.4 in June decreased by US$7.6 billion due to the operations of the and July respectively, compared to 36.2 in May 2020. Central Bank within the fiscal rule framework and sales Figure 3: In the second quarter of 2020, retail trade of foreign currency in the Sberbank deal under the new registered a decline of 16.6 percent, y/y facility. Russia’s GDP contracted less than expected in the second quarter of 2020. Rosstat’s flash estimate of GDP growth in the second quarter of 2020 turned out better than expected: -8.5 percent, y/y, compared to a 9.6 percent contraction expected by the Ministry of Economic Development. According to the flash estimate, Russia performed better than many other countries, which registered a double-digit contraction such as Germany, Portugal, Italy, Austria, Belgium, France, UK, Spain, Hungary and Mexico. Russia’s output decline was cushioned by the macroeconomic policy of the government in accordance with the macroeconomic framework established in the last three years, as well as In July 2020, the annual headline inflation accelerated recent expansionary monetary and fiscal policy to 3.4 percent compared to 3.2 percent in June (Figure measures. While details on GDP growth in the second 4). The rise in headline CPI inflation was mostly due to quarter are not yet available, high frequency statistics the acceleration of the 12-month food price inflation reveal that output in five basic economic activities from a low base last year (4.2 percent, y/y, versus 3.9 contracted by 9.7 percent, y/y. Agriculture, which percent in June). The 12-month non-food inflation expanded at 3.1 percent in the second quarter, slightly accelerated to 3.1 percent, up from 3 percent a prevented a steeper GDP decline, while retail trade, month prior, while the 12-month services inflation remained at the same level as in June, at 2.5 percent, y/y. 3 Core CPI, which excludes food and gasoline, slightly increased by 3.0 percent in July, up from 2.9 percent increase in June. The drop in aggregate demand continues to be a disinflationary factor. Figure 4: In July, consumer price inflation accelerated to 3.4 percent, y/y In the first seven months of 2020, the federal budget registered a deficit of Rub1,519.61 billion compared to a surplus of Rub2,028 billion in the same period last year. This was on the back of higher spending and lower oil/gas revenues. In January-July, oil/gas revenues dropped by 39.3 percent, y/y. A weaker ruble could not fully compensate for the fall in oil prices and a drop in Labor market dynamics deteriorated in June 2020. The economic activity. Non-oil tax receipts also declined: VAT unemployment rate (seasonally adjusted) increased to receipts dropped by 2.1 percent, y/y, in the first seven 6.4 percent in June, up from 6.2 percent in May and 4.6 months of 2020, and corporate income tax receipts percent in March. (Figure 5). This reflects the labor dropped by 9.8 percent, y/y. Total fiscal revenues market’s reaction to declines in the real sector as a result decreased by 9.3 percent, y/y, in the first seven months of the COVID-19 crisis and the containment measures. In of 2020 (18.6 percent, y/y, not accounting for one-off the second quarter of 2020, real disposable incomes channelling of the receipts from the Sberbank purchase). decreased significantly, by 8 percent, y/y, compared to Primary expenditures increased by 27.6 percent in the the 1.2 percent growth, y/y, in the first quarter. Overall, January - July 2020 period. Spending on social policy, in the first half of 2020, real disposable incomes health, and the national economy were the main drivers decreased by 3.7 percent compared to the same period of this growth. Higher primary spending led to a in 2019. The real wages growth improved in May, deterioration of the non-oil/gas federal budget primary increasing by 1 percent, y/y, compared to a contraction deficit, which reached Rub4.0 trillion compared to a of 2 percent in April, y/y (information on real wages is deficit of Rub2.3 trillion in the same period last year. The now being published with one-month lag). The relatively federal budget deficit was largely financed by means of large public sector supports real wages dynamics in borrowing in the domestic market and liquid reserves Russia. from the previous year. Debt denominated in rubles grew by Rub1.2 trillion. Overall debt of the federal government increased to Rub14.8 billion from Rub13.6 Figure 5: In June, the labor market dynamics billion (12.3 percent of GDP) in January. deteriorated 1 Since May 2020, the Ministry of Economic Development has been not providing estimate of nominal GDP, thus fiscal outcomes are reported in billion rubles. 4 The consolidated regional budget primary surplus aggregate capital adequacy ratio stood at 12.7 percent (Rub695.7 billion in January-June 2019), turned into a (against a regulatory minimum of 8 percent). Non- Rub213.7 billion deficit in January-June 2020 on the performing loans increased to 9.7 percent of total loans back of higher expenditures (+18.9 percent, y/y). compared to 9.3 and 9.4 percent in March and April, Notably, expenditure on healthcare rose by 84.8 percent, respectively, as household and firm finances started to y/y, and spending on social policy and national economy deteriorate due to disruption in economic activity also increased significantly (+15.9 percent, y/y, and +22.1 resulting from the COVID-19 outbreak and a rise in percent, y/y, respectively). Revenues of the consolidated unemployment. Higher provisioning charges and lower regional budget increased by 2.1 percent, y/y, due to earnings, including a substantial drop in fees and increased support from the federal budget (+57 percent, commissions, resulted in the banking sector's profits y/y), while own revenues of consolidated regional falling in the second quarter 2020 after recording strong budgets dropped by 7 percent, y/y, in the first six months profits in the first quarter. In the first half of 2020, the of 2020. Deficits were registered in 47 regions. net banking sector’s profit amounted to Rub630 billion (US$9.1 billion) compared to Rub1,005 billion (US$15.4 Since the introduction of lockdown measures in March, billion) in the same period in 2019. As of June 1, the the economic downturn began to influence bank return on assets (ROA) and return on equity (ROE) were operations, leading to a slowdown in lending, rising 1.9 percent and 17.5 percent, respectively, compared to non-performing loans (NPLs), and higher provisioning. 2.1 percent and 19.1 percent, respectively, in January. In order to mitigate the effects of the COVID-19 pandemic and to ensure financial stability, the Central After a slowdown in April - May, credit growth Bank of Russia (CBR) adopted a broad set of measures to accelerated in June. Household lending grew by 1.0 support liquidity in the banking sector via targeted percent, m/m, compared to 0.2 percent, m/m, in May interventions and granting of temporary regulatory and a contraction of 0.7 percent, m/m, in April. Mortgage forbearance to banks and other financial institutions lending was the major contributor to household credit until September 30, 2020. On August 10, 2020, the CBR growth, mainly supported by the government’s extended some of the regulatory forbearance measures, preferential 6.5 percent mortgage lending program. including those related to loan loss provisioning till However, in annual terms, household lending growth December 31, 2020. In particular, the CBR has (i) slowed down to 12.6 percent, y/y, in June, versus 18 extended forbearance measures regarding provisioning percent, y/y, at the beginning of the year. Credit to the to restructured loans for individuals and SMEs; (ii) corporate sector in rubles slightly increased by 0.5 lowered the premiums to the risk ratios for unsecured percent, m/m, in June, after zero growth in May. In consumer loans; and (iii) kept the countercyclical capital annual terms, it remained flat, at 7.3 percent, y/y, after buffer at zero. However, the CBR has stressed that adjusting for FX changes—the same as a month before. provisions for loans restructured before the end of 2020 On the back of the gradual stabilization of the economic must be formed in full by July 1, 2021. The CBR has also situation, the demand from borrowers, both households decided not to extend certain liquidity easing measures, and corporates, for the restructuring of their loans, as citing the improvement of the banking-sector’s liquidity well as for payment holidays, has started to decrease. since the start of the pandemic. According to the CBR, between March 20th and July 29th, Despite the negative economic effects of the pandemic, banks restructured loans from 2.4 million individual banks’ key credit risk and performance indicators borrowers. While there was a trend towards a decreasing remained stable as banks benefited from the CBR’s number of individuals applying for loan restructurings in support measures 2 (Figure 6). As of June 1, 2020, the July, the number of applications submitted by SMEs was 2 Including regulatory forbearance measures. 5 almost the same. Overall, for the period of March 20 – Figure 6: Key credit risk and banking performance July 27, 2020, the volume of corporate restructured loan indicators remained stable debt exceeded Rub3.6 trillion (11.9 percent of the total portfolio of the systematically-important credit organizations (excluding SMEs)). The volume of household restructuring loan agreements amounted to Rub697 billion. On June 19th and July 24th, the CBR cut the key policy rate by 100 and 25 basis points, respectively, to a record low of 4.25 percent. The historically low key policy rate and a 13 percent tax on interest from all bank deposits over Rub1 million (US$14,000), which will become effective in 2021, stimulated an unprecedented surge in retail investors into the Russian stock and bonds market. Retail investors accounted for 42 percent of trading volume on the exchange in June, up from 34 percent a year earlier. More than 5.3 million individual Russians now have . brokerage accounts for trading stocks on the local stock market, a rise of 1.5 million since January. In its analytical work, the World Bank uses official statistics of the Russian Federation. 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. 6