EDB Macroreview, April 2019. Russian Federation: trends and forecasts

In 2018, the Russian economy grew at its highest rate since 2012. Higher net exports were the main factor behind accelerated growth. Consumer and investment activity remained positive contributors to economic growth. We expect Russia’s GDP growth to slow temporarily, constrained by the increased tax load and the impact of the key rate increase in late 2018. Increased investment expenditures of the federal budget and gradual normalization of monetary policy from 2nd half of 2019 will foster a mid-term economic recovery to the potential rate, that we estimate at 2% per annum. The Russian ruble’s exchange rate became more volatile in 2018 amid exacerbated geopolitical tension. Harsher U. S. sanctions rhetoric caused greater capital outflow from the Russian economy, reflected in quicker weakening of the ruble. Barring additional shocks, we expect the Russian currency to strengthen over 2019 from the level of late 2018, in particular because return on Russian assets will remain high. Inflation accelerated in 2018, driven by a weakening ruble, faster growth of some food prices and price correction in advance of the VAT increase. The increase in inflation in 2nd half of 2018, accompanied by growing inflationary expectations, led the CB RF to raise its key rate twice, by 0.25 pp in September and December, to 7.75% at the end of 2018. We expect the acceleration of inflation to continue into the 1st half of 2019, mainly driven by the VAT increase. Starting in 2nd half of 2019, inflationary pressure will decrease gradually and allow inflation to return to its target level in 2020. As inflation slows, the key rate is expected to return to its neutral level, that we estimate at 6.5– 7%, in 2020. In 2018, the federal budget posted a surplus for the first time since 2011, assisted by a favorable commodity price background in most of 2018. The budget is expected to remain in surplus in the medium term, with oil prices staying above USD 60 per barrel. The budgetary policy focus will gradually move towards higher investment expenses in the coming years, with effects including a higher potential economic growth rate.