Russian Q1GDP expanded 0.5% yoy, based on the State Statistical Service’s initial estimate, suggesting a return to positive growth in 2017 looks likely after 2 years of negative growth. Interestingly, the Russian Finance Ministry upgraded their forecast for 2017 growth to 2% yoy from 0.6%: this looks a little on the optimistic side although a recovery in consumption is expected. For example, Fitch estimate GDP growth to be 1.4% in 2017 and 2.2% in 2018 and Moody’s forecast a growth rate of 1% in 2017 and 1.5% in 2018.
The Central Bank has scope to cut interest rates further: the key interest rate is at 9.25% as inflation is trending down with the last print at 4.1%, virtually at the Central bank’s target, and the strong rouble has continued to put downward pressure on import prices. The central bank has cited oil prices as a key factor to monitor and the central bank governor, Ms Nabiullina, has stated that she expects the policy rate can fall to ~300 bps above the inflation target once inflation expectations have stabilised. Importantly, lower rates could help support a recovery in domestic demand as both private investment and consumption collapsed in the 2015-2016 period.
But as with much of the world, Russia faces a lower growth rate. Depressed levels of investment are one factor behind this. On the cyclical front the Russian economy is highly dependent on oil and commodities and crude’s decline since mid-2014, when it was trading in excess of USD100 per barrel, hurt. Credit strengths such as the country’s low debt level, strong external position and flexible exchange rate could only mitigate the effects of the downturn and international sanctions. Beyond this, Russia also faces structural challenges that have constrained potential growth; now estimated to be around 1.5%-2%. One aspect is productivity and the need to improve institutional strength and ease of doing business but another also presents itself in the form of an unfavourable demographic profile.
Russia’s population peaked at 148.2m in 1995 but since then the population has been in decline falling to 143.5m in 2015 (UN data). This trend, absent a massive immigration influx, is projected to continue despite some improvement in the fertility rate (children per woman) which is forecast to increase from 1.66 in 2015 to 1.79 in 2030. The UN forecast the population to decline to 138.7m by 2030. Compounding this, the population is ageing and the dependency ratio (those aged below 15 and above 65 to the working-age population) is forecast to continue to increase from 43.1% in 2015 to 56.6% in 2030.
Encouragingly, Vladimir Putin noted in his Address to the Federal Assembly in December 2016 that improving Russia’s growth rate was a key area the government would focus on in coming years. The former finance minister, Alexei Kudrin is reported to be working with President Putin on a program including structural reforms and measures to boost investment and productivity. The Economy Minister Maxim Oreshkin noted that Russia needs an additional RUB5tn (~USD87.5bn) in annual investment to reach a 3% GDP growth rate.
Russia is certainly not alone in facing such considerable structural challenges. Demographic constraints continue to inhibit the outlook for global growth: According to the United Nations, the entire populations (not just those of working age) of 48 countries or areas in the world are expected to decrease between 2015 and 2050. Add to this disappointing levels of productivity growth and elevated global debt levels and it is hard to see anything but weak growth going forward, and that means interest rates and inflation are likely to remain low for several decades. In that context, long-dated investment-grade bonds with yields in excess of 4 percent look extremely compelling.