Russia Monthly Economic Developments March 2019 Incoming data confirms that global growth lost momentum in 2018, driven by a noticeable deceleration in both advanced economies and emerging market and developing economies (EMDEs). The loss of momentum was particularly pronounced in manufacturing amid signs of softening global investment and trade. The global manufacturing PMI suggests continued weakness in January and February 2019, with the index falling to its lowest level since mid-2016. After rising 8 percent in February, crude oil prices continued to increase in March this year: The price of Brent, the international marker, reached $68/bbl by the middle of the month, and WTI, the U.S. benchmark, increased to $58/bbl. In February, the Russian ruble gained 2.2 percent compared to the previous month, supported by the easing of global financing conditions, higher oil prices, and a relatively lower risk perception. Russia’s economic growth was weak in January with output in five basic sectors 1 increasing by 0.2 percent, y/y, compared to a 1.9 percent growth, y/y, in December 2018. In February, annual consumer inflation accelerated to 5.2 percent, y/y, up from 5.0 percent, y/y, in January. Monthly inflation growth decelerated across all categories in February, sa, as January experienced the most intense VAT-pass-through effect. Labor market dynamics were stable in January, and real wages continued to grow but only increased by 0.2 percent compared to the same period in 2018. The federal budget balance improved in January compared to the same period last year on the back of stronger non-oil revenues. Credit expansion continued into 2019, but the fast-paced expansion in household credit could pose a risk to financial stability if the macroeconomic environment were to deteriorate. Key credit risk and performance indicators remained largely stable in early 2019. more benign EMDE financing conditions and The Global Context bond market stabilization. Incoming data confirms that global growth lost momentum in 2018, driven by a After rising 8 percent in February 2019, noticeable deceleration in both advanced crude oil prices continued to increase in economies and emerging market and March, with the price of Brent, the developing economies (EMDEs). Growth in international marker, reaching $68/bbl by the Euro Area nearly halved in 2018, ending the year at the middle of the month, and WTI, the U.S. 0.9 percent (q/q saar). Growth fell precipitously in benchmark, increasing to $58/bbl. Global oil production EMDEs, down to 3.9 percent (q/q saar) after registering continues to tighten, with output among OPEC countries 5.4 percent (q/q saar) at the start of 2018. The slowdown falling to 220 thousand barrels per day (kb/d) in coincided with the waning effect of stimulus measures in February. Total OPEC production is now 30.5 mb/d, major economies, tighter financing conditions, financing down from 32.1 mb/d in the fourth quarter of 2018. stress in some EMDEs, and elevated policy uncertainty. Saudi Arabia continues to reduce supply and has The loss of momentum was particularly pronounced in announced that its oil output in March and April could be manufacturing amid signs of softening global investment even lower than what was agreed upon in December. and trade. The global manufacturing PMI suggests Production in Venezuela has also fallen further following continued weakness in January and February, with the recent power outages. Russia is expected to gradually index falling to its lowest level since mid-2016. Amid reduce its output by the agreed 0.23 mb/d. These deterioration in global growth prospects, global production declines have been balanced by ongoing financing conditions have eased, leading to generally output increases in the U.S., especially in the Permian basin; however, there are tentative signs that the pace of growth is slowing. The U.S. Energy Information 1 Output in five basic sectors is an aggregate indicator, which includes agriculture, industrial production, construction, transport, retail, and wholesale trade. 1 Administration revised down its forecast for U.S. Figure 2: The average ruble nominal exchange rate production by 100kb/d in 2019 and 200 kb/d in 2020. gained 2.2 percent in February 2019 U.S. oil inventories fell unexpectedly in mid-March, and growth in the rig count has slowed significantly, with the number of rigs down by 56 since the start of the year (Figure 1). In a surprise move, Norway announced that its oil fund would divest from oil and gas companies, a move that was interpreted as a signal of poor longer-term prospects in the oil industry. Figure 1: In mid-March, growth in the rig count has slowed significantly Despite lower oil prices in the first two months of 2019 compared to the same period last year, Russia’s current account strengthened (albeit slightly) due to a higher trade balance surplus and stronger primary and secondary income balances. According to preliminary information, in January – February 2019, the current account surplus reached US$22.3 billion compared to US$20.6 billion in the same period last year. Net capital outflows from the private sector grew to US$18.6 billion from US$8.7 billion in the same period last year largely due to an increase in net foreign assets. Russia’s Recent Developments Economic growth was weak in January (Figure 3). In February 2019, the Russian ruble gained 2.2 percent Output in five basic sectors increased by 0.2 percent, y/y, from the previous month, with the ruble average compared to a 1.9 percent growth, y/y, in December exchange rate strengthening to 65.9 against the U.S. 2018. Growth in industrial production (1.1 percent, y/y, dollar (Figure 2). A factor weighing down on the ruble +0.1 percent, m/m, sa) was driven by firm mineral exchange rate dynamic was the additional forex resource extraction growth (4.8 percent, y/y, following a purchases by the Central Bank of Russia (these are low base of 2018). Yet, compared to December 2018, delayed currency purchases from last year). However, growth in mineral resource extraction was negative supported by the easing of global financing conditions, following seasonal adjustment as Russia joined the higher oil prices, and a somewhat lower risk perception OPEC+ agreement. Manufacturing output dropped by 1 (CDS spreads slightly decreased in February), the ruble percent, y/y, prompted by a dip in production of non- strengthened with respect to the U.S. dollar. auto vehicles (partly related to military production). As expected, retail sales growth decelerated in January to 1.6 percent, y/y, compared to 2.3 percent, y/y, in December 2018. This was due to a VAT rate increase, low real wages growth (+0.2 percent, y/y), and declining real incomes (-1.3 percent, y/y). Continued rapid growth of retail credits and a preferential VAT rate for a large part of food produce supported retail trade. Wholesale trade 2 dropped by 6.2 percent, y/y, weighing down on the January from 4.8 percent in the previous month. This growth in five basic sectors (energy goods sales increase was mostly driven by seasonal factors. The constitute about half of wholesale trade). seasonally adjusted rate decreased by 0.1 percentage points in the same period (Figure 5). Real wages Figure 3: Economic growth was weak in January continued to grow but increased by only 0.2 percent in January compared to the same period in 2018, and contracted by 0.4 percent compared to December 2018 following seasonal adjustment. In January, real disposable incomes decreased by 1.3 percent compared to the same period in 2018. However, they increased by 3.2 percent compared to December 2018 following seasonal adjustment. This indicator is very volatile and is driven, to a large extent, by sources of income that are not registered by statistics. Pensions were indexed in the beginning of 2019 and grew by 0.8 percent (adjusted for inflation) in January compared to the same period a year ago. In February 2019, annual consumer inflation accelerated to 5.2 percent, y/y, up from 5.0 percent, Figure 5: Labor market dynamics were stable in January y/y, in January 2019 (Figure 4). Prompted by a higher contribution of food inflation (0.2 pp), the 12-month consumer inflation accelerated in February. In the same month, monthly inflation growth decelerated across all categories, sa, as January experienced the most intense VAT-pass-through effect. Core inflation increased to 4.4 percent, y/y, in February 2019, up from 4.1 percent, y/y, in January. Household inflation expectations remain elevated although they eased to 10.1 percent in February, down from 10.4 percent in January. Figure 4: The consumer price index accelerated in February 2019 On the back of stronger non-oil revenues, the federal budget balance improved in January 2019 compared to the same period last year. Despite lower oil prices, federal budget revenues increased to 19.4 percent of GDP in January, up from 19.1 percent in the same period last year. This was the result of a 0.9 pp increase in non- oil revenues with non-oil federal budget revenues reaching 10.5 percent of GDP on the back of the VAT rate increase and improvement in tax administration. In January 2019, the VAT tax increase largely affected tax receipts from VAT levied on imported goods and services. The new VAT rate levied on goods and services Labor market dynamics were stable in January 2019. produced domestically will be reflected in tax receipts The unemployment rate grew slightly to 4.9 percent in starting in the second quarter of 2019. Oil/gas revenues 3 decreased to 8.9 percent of GDP from 9.7 percent of GDP reporting methods. At the end of 2018, the return on due to lower oil prices. Federal budget expenditures rose assets (ROA) and the return on equity (ROE) increased to to 15.7 percent of GDP, up from 15.5 percent of GDP last 1.5 percent and 13.8 percent, respectively, up from from year due to higher spending on national defense (+0.6 1.0 percent and 8.3 percent, respectively, at the percent of GDP), education (+0.3 percent of GDP), and beginning of the year. social policy (+0.2 percent of GDP). The increase in Figure 6: Key credit risk and banking performance primary expenditures was outweighed by non-oil/gas indicators remained stable in December revenue increases, which led to an improvement of the non-oil/gas federal budget primary deficit to 4.6 percent of GDP compared to 5.2 percent of GDP in the same period last year. Credit expansion continued into 2019. Credit to the corporate sector in rubles grew by 12.3 percent in January, y/y, while loans to households rose by 23.2 percent, y/y, driven mainly by unsecured loans and mortgage loans. The recent fast-paced expansion in household credit could pose a risk to financial stability if the macroeconomic environment were to deteriorate. Lending growth has been outpacing wage growth (22.6 percent vs 9.9 percent in 2018 respectively) and if this On March 11, 2019, Evrofinance Mosnarbank (ranked trend persists, debt service costs may become an #83 by assets) was placed on the U.S. sanctions list for excessive burden, especially for lower-income supporting Venezuela’s state-owned oil company households which are seeing a rapid increase in their PDVSA, which has been on the U.S. sanctions list since leverage. Moreover, the rapid expansion in unsecured January. Under the sanctions, U.S. individuals or entities household credit leaves the sector more vulnerable to a are prohibited from doing business with Evrofinance deterioration in the economic outlook and could lead to bank. The bank was founded in 2011 as a binational bank a build-up of non-performing assets if growth slows to fund joint Russia-Venezuela oil and infrastructure substantially. To address the risks posed by accelerated projects. Venezuela’s development bank owns 50 growth in consumer lending, the CBR adjusted risk percent of the bank, with the rest split between Russia’s weights on unsecured retail loans three times in 2018 state-controlled Gazprombank and VTB Group. (the latest increase to become effective April 1, 2019) The Central Bank continued its efforts to clean up the and will require banks and microfinance organizations to banking system, honing in on banks that are non- calculate DTI (debt-to-income) ratio beginning in the compliant with regulations and conducting risky fourth quarter of 2019. operations. The number of banks in Russia has fallen Key credit risk and performance indicators remained from 484 at the beginning of 2019 to 479 as of February largely stable (Figure 6). As of January 1st, the capital 1, 2019. As of March 2019, the transfer of non- adequacy ratio stood at 12.2 percent (against a performing assets from failed banks to Trust Bank, which regulatory minimum of 8 percent). The non-performing was set up as a “bad bank” in 2018, was completed. Total loan ratio has been fluctuating around 10 percent, assets transferred amount to RUB2 trillion (USD$30.45 standing at 10.1 percent in January compared to 10.4 billion). The CBR recently reduced the amount expected percent in the previous month. The banking sector's to be recovered from Trust Bank to only 20 percent of profit in January 2019 amounted to 264 billion rubles the assets transferred, down from previous estimates of compared to 71 billion rubles in January 2018 although 40-60 percent. this growth was, in part, affected by a change in 4 Main Economic Indicators 2018 2019 2017 2018 Output Indic ators Jan Feb Mar Apr May Jun Jul Aug Sept Oc t Nov Dec Jan Feb GDP, % change, y-o-y 1.6 - - 1.3 - - 1.9 - - 1.5 - - - 2.3* - Basic sectors, % change, y-o-y 2.5 2.3 2.7 1.9 3.7 3.7 1.6 2.8 1.2 0.7 3.6 1.8 1.9 2.9 0.2 Industrial production, % change, y-o-y 2.1 2.4 3.2 2.8 3.9 3.7 2.2 3.9 2.7 2.1 3.7 2.4 2.0 2.9 1.1 Manufacturing, % change, y-o-y 2.5 4.3 4.7 2.2 5.3 5.4 2.2 4.6 2.2 -0.1 2.7 0.0 0.0 2.6 -1.0 Retail trade 1.3 2.9 2.0 2.2 2.9 2.6 3.3 2.7 2.8 2.2 2.0 3.0 2.3 2.6 1.6 Extraction of mineral resources, % change, y-o-y 2.1 0.8 1.2 2.4 2.5 1.3 2.8 3.2 4.5 6.9 7.4 7.8 6.3 4.1 4.8 Construction, % change,y-o-y -1.2 12.2 9.4 -2.5 11.0 7.9 3.1 -0.7 3.3 5.9 5.7 4.3 2.6 5.3 0.1 Fisc al and Monetary Indic ators Federal government balance, % GDP -1.4 2.8 1.6 1.8 0.9 1.4 1.9 2.5 3.1 3.5 3.6 3.7 2.7 2.7 3.7 Inflation (CPI), %, y-o-y 3.7 2.2 2.2 2.4 2.4 2.4 2.3 2.5 3.1 3.4 3.5 3.8 4.3 2.9 5.0 5.2 Inflation expectations, %, y-o-y 10.3 8.9 8.4 8.5 7.8 8.6 9.8 9.7 9.9 10.1 9.3 9.8 10.2 10.2 10.4 10.1 Balanc e of Payment Indic ators Trade Balance, billion $ (monthly) 115.4 16.9 12.2 15.0 15.0 15.2 15.2 13.2 15.9 18.9 19.7 19.0 18.9 194.4 13.4 Current Account, billion $, ytd 35.4 12.9 20.6 30.0 39.5 47.2 48.4 57.5 65.5 76.0 - - 114.9 114.9 Export of goods, billion $ 353.5 33.4 31.2 36.9 36.2 36.5 36.6 34.4 37.4 38.7 41.3 40.5 41.4 443.4 Import of goods, billion $ 238.1 16.4 19.0 21.9 20.9 21.4 21.0 21.0 21.6 19.8 21.6 21.5 22.5 249.0 Financ ial Market Indic ators CBR policy rate, %, end-o-p 7.75 7.50 7.50 7.25 7.25 7.25 7.25 7.25 7.25 7.50 7.50 7.5 7.75 7.75 7.75 7.75 Credit to households in Rub, % change, y-o-y 7.4 14.5 15.2 16.1 17.1 18.5 19.4 20.3 21.1 22 22.5 23.1 22.6 22.6 23.2 Credit to the corporate sector in Rub, % change, y-o-y 2.0 5.1 5.5 6.3 7.5 6.9 7.4 8.1 9.5 8.4 9.7 10.6 12.0 12.0 12.3 Capital adequacy ratio 11.6 12.1 12.4 12.5 13.0 12.7 12.8 12.2 12.2 12.5 12.4 12.3 12.2 12.2 NPLs to total loans 10.0 10.0 10.5 10.6 10.7 10.6 10.9 10.9 10.9 10.7 10.5 10.4 10.1 10.1 Loan loss provisions to total loans 9.2 9.3 9.6 9.7 9.6 9.5 9.8 9.7 9.8 9.5 9.4 9.3 9.1 9.1 Return on assets (ROA) 1.3 1.0 0.9 0.9 1.0 0.9 0.8 0.8 0.8 1.4 1.5 1.4 1.5 1.5 Return on equity (ROE) 10.6 8.3 7.9 8.0 8.5 8.1 7.0 6.8 6.8 12.4 13.3 12.4 13.8 13.8 Inc ome, Poverty and Labor Market Real wages, % change, y-o-y 6.2 11.0 10.5 8.7 7.6 7.6 7.2 7.5 6.8 4.9 5.2 4.2 2.9 6.8 0.2 Unemployment (%, ILO definition) 5.1 5.2 5.0 5.0 4.9 4.7 4.7 4.7 4.6 4.5 4.7 4.8 4.8 4.8 4.9 Exc hange rate USD/ RUB, average 58.3 56.8 56.8 57.0 60.4 62.2 62.7 62.8 66.1 67.7 65.8 66.2 67.3 62.5 67.3 65.86 Euro/ RUB, average 65.8 69.0 70.3 70.4 74.2 73.7 73.2 73.4 76.2 79.0 75.7 75.3 76.6 73.9 76.9 75.78 Oil pric e Brent, $/ bbl 54.4 69.0 65.4 66.5 71.6 76.7 75.2 74.4 73.1 78.9 80.5 65.2 56.5 71.1 59.3 64.1 *Quarterly data are not consistent with the annual number. Source: Rosstat, CBR, EEG. 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. 5