In Russia the accounts improve, but the growth arrives in 2017 (+0,8%)

According to a recent report by the Intesa Sanpaolo Study Centre, economic activity in Russia recorded a large fall (-3,7%) due to the collapse in the price of exported raw materials, the slowdown in domestic demand, which was weighed down by inflation and high interest rates, the economic effects (sanctions, capital outflows, contraction of FDI) of tense relations with Western countries cause of the Ukrainian crisis.

On the demand side, in 2015 it registered a collapse of both private consumption (-9,5%) and investments (-7,8%), while foreign trade made a positive contribution to the GDP thanks to the growth in exported volumes (+3,7%) against the collapse of imports (-25,7%). On the supply side, there is a substantial contraction of some services such as sales (-8,9%), hospitality (-5,7%), construction (-7,3%) and manufacturing production (-3,1% ), while agricultural production (+3%) and mining (+1,1%) continued to grow.

The agricultural sector it benefited from sanctions against agricultural products from Western markets, while mining production benefited from a growth in the extraction of oil and some metals. The public deficit it rose to 2,6% of GDP in 2015, from 0,5% the previous year. The share of revenue dependent on the sale of hydrocarbons fell to 43% from 51% in 2014. At the end of May, however, Russia raised $1,75 billion with a 75-year Eurobond; 4.75% of the issue was subscribed by foreign investors but with a yield of 100%, about XNUMXbp above issues from countries with the same rating such as Hungary and Indonesia.

 

In the first three months of the year, GDP decreased by 1,2% in real terms, compared to the -3,8% recorded in the previous quarter. Since April, as a consequence of the cuts in public investments, the recovery of industrial production (+0,8%) is highlighted thanks above all to manufacturing (+0.4%), the persistent weakness of retail sales (-5.5%), in particular those of cars (-11,4%), and, above all, the fall in construction (-7,5%).

In recent months, the economy benefited from the progressive stabilization of the financial framework, the slowdown in inflation (to 7,5% from 12,9% at the end of 2015), the best liquidity conditions and currency flexibility which made it possible to contain the effects on the public finances of the drop in revenues from hydrocarbons. Furthermore, the recovery in the price of hydrocarbons (over 40% from the lows of last January), in addition to easing pressure on the public finances, has favored the re-appreciation of the ruble with positive effects on inflation, purchasing power and confidence.

However, despite these signs of recovery, various negative factors of both a cyclical and structural nature continue to hold back economic activity and demand. The collapse (-40%) of per capita income in dollars seen in the last two years is destined to have depressive effects on spending for a long time to come: the uncertain prospects of the economy, of the material markets and the difficult relations with Western countries have a negative impact on investor confidence and curb both domestic and foreign direct investment. Particularly penalized are investments in the exploitation of natural resources, in infrastructures and in the modernization of the manufacturing sector. Hence, as reported by the IMF, Russian GDP is expected to contract again this year (-1,8%) and return to a path of growth, albeit modest, only in 2017 (+0,8%).

In 2015, the current surplus of the balance of payments it widened to $69,5 billion (5,3% of GDP), from $58,3 billion in 2014. This improvement was mainly driven by the reduction in the income account deficit, thanks to lower payments to non-residents for capital invested in the country, after the substantial outflow of funds that has been recorded in the last two years, and the decrease in the deficit of the services account, in particular those relating to foreign trade.

The trade surplus it contracted from 189,7 billion to 148,5 billion. At the same time, the decline in the prices of exported raw materials it more than compensated for the drop in imports (-37%), due both to the replacement of imported goods with domestic goods and to the decrease in domestic demand, above all for durable consumer goods and capital goods. in the first five months of 2016 the current balance surplus it went from 43,9 billion to 17,8 billion mainly due to the recovery of imports against a further contraction in exported values. The ruble, which in mid-January had reached a new high against the dollar (above RUB 80:1 USD) has staged a significant recovery in recent months, reaching RUB 64:1 USD in late June, on the back of the of the oil price.

The financial part of the Balance of Payments it again recorded a sizeable deficit (72,8 billion), albeit substantially down on the previous year (173,7 billion). During 2015, the process of draining foreign exchange reserves, while continuing, slowed down significantly compared to what was seen in 2014. In December 2015, these amounted to 309 billion against 328 billion a year earlier. In the first months of 2016, Russia has returned to accumulating reserves, reaching 320 billion last May. Of these reserves, almost €90bn were foreign currency deposits of the two Sovereign Wealth Funds, which had a capitalization of €2016bn in May 112, down from €176bn at the end of 2013. The reserves exceed the estimated 2016 external financing needs of €62bn, for a reserve cover ratio of 5.1. External debt fell from 729 billion to 516 billion in March 2016: Over 65% of debt was held by the non-financial sector and over a quarter by banks. As of December 2015, 85% of the debt was in foreign currency and less than 10% was due in 2016.

Falling oil prices, deteriorating fiscal position, large capital outflows with foreign exchange reserves draining, ruble crisis and worsening growth prospects they were the main reason for cutting Russia's sovereign debt rating. S&P and Moody's have removed the country from investment grade, assigning BB+ and Ba1 respectively, in both cases with a negative outlook. Fitch also changed its rating to BBB-/N, but still kept it in investment grade.

The management of monetary policy careful to favor the reduction of inflationary pressures rather than to support growth, the currency flexibility which has increased the degree of freedom of economic policy and the recovery in the price of oil have favored the progressive stabilization of the domestic financial picture. We have thus witnessed a recovery of the currency, the resumption of a process of accumulation of reserves and a slowdown in the outflow of capital. So much so that the CDS spread went from 400bp at the end of January to below 250bp at the end of June and the Russian stock market was the top performer in Eastern Europe in the first half of 2016.