The Daily Update - Russia: State of the Nation & Growth

Russia’s 2018 GDP growth surprised on the upside registering 2.3% growth when market expectations had been for 1.8% growth and the central bank had been forecasting 1.5-2% growth. Notably, for 2018 Rosstat revised up the contribution from construction in the first 11 months of the year with the Yamal LNG project a factor. Other potential factors boosting 2018 growth include the world cup, some increased oil production as the OPEC cuts were eased and the ramp up of Yamal LNG. Importantly, the Economy Ministry stated the figure is seen as reflecting one-off factors rather than a sustainable increase and is forecasting growth of 1.3% for 2019.

Russia faces a number of structural challenges that constrain potential estimates to around 1.5%-2%. One aspect is productivity, the need to improve institutional strength and ease of doing business but another is an unfavourable demographic profile.  

According to data from Rosstat, in 2018 Russia’s population declined for the first time since 2008.  The birth-rate has been declining over the past few years but last year immigration also failed to make up for the decrease in the population. Improving Russia’s growth rate has been a focus for the Russian government and President Vladimir Putin’s State of the Nation speech earlier this week specifically addressed this: ‘Russia has entered an extremely challenging period in terms of demographics’ and that ‘the birth rate is declining’. The speech noted that Russia had overcome ‘negative demographic trends in the early 2000s’ and stated that they want to return to the natural population growth rate by 2023-early 2024. Thus, Putin emphasised a package of measures to support families including a rise in child benefit; tax breaks for families reflecting ‘the more children there are, the lower the tax’ and an increase in disability support payments.

Moves to address the structural impediments to growth are encouraging and enabled by Russia’s prudent fiscal management (further enhanced by the introduction of a fiscal rule and (an unpopular) increase to the retirement age), low debt levels, a strong external position and flexible exchange rate. These financial strengths and buffers enabled the country to mitigate the impact from the lower oil price period and international sanctions. With the fiscal rule Russia has been able to replenish its reserves as oil prices recover and fund initiatives such as those talked about in the President’s speech. Moreover, as Moody’s noted in its upgrade earlier this month ‘the impact of likely new sanctions -- which is the most likely source of such a shock in the coming months -- could, in the rating agency's view, be contained without material damage to the country's credit profile.’

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