Russia-2019: A Summing Up of the Economic Track-Record

Russia is approaching the end of 2019 with a set of important achievements that should form the basis for continued resilience to external shocks and the maintenance of macroeconomic stability. Apart from low inflation level (some would argue, however, that it may be too low for comfort), there is also the notable exchange rate stability, strong stock market performance, as well as the launching of the National projects that are currently seen as a key gateway to boosting Russia’s economic growth in the medium-term. At the same time, there remain concerns over Russia’s sluggish growth performance as well as the decline in real disposable income of the population which persisted throughout much of this year.

On the domestic front, among the policy measures of this year the launching of the “regulatory guillotine” may alleviate to some extent the burden faced by the corporate sector in dealing with bureaucracy and red tape. On the fiscal front the revenue intake was boosted by the rise the VAT rate and increasing tax compliance, while on the spending side the main concerns were focused on the slow implementation of the financing of National projects. In the monetary sphere the key vulnerability as identified by Maxim Oreshkin, Russia’s Economy Minister, was the excessive rate of consumer loan growth. The latter however subsided towards the end of the year as the CBR introduced a series of policy measures designed to keep a lid on consumer credit growth going forward.

The external backdrop in 2019 may be categorized as being broadly favourable, given the reduced sanctions pressure, the relatively comfortable level of oil prices (partly on the back of the OPEC+ measures) and increasing inflows into Russia’s financial instruments (both equity and fixed income). This has further scope to improve next year with potential progress on the Russia-Ukraine settlement or the related discussion on the relaxation of the EU sanctions pressure coming on the back of the headway in the Minsk process. On the other hand the sanctions rhetoric may well be reignited closer to US presidential elections (Russia’s meddling in the electoral process being one of the possible themes yet again), oil price decline on the back of weak demand and rising supply, as well as lingering concerns with respect to the global economic slowdown. On the latter point, a slowdown in China may be considered as an increasingly important vulnerability, given the rising prominence of China in Russia’s trade and investment flows.

In terms of foreign trade alliances Russia together with partners from the Eurasian Economic Union in 2019 concluded FTA agreements with Singapore and Serbia. Further ahead are potential agreements with India, Israel and Egypt, with dozens of countries and regional blocks having expressed their interest in concluding cooperation agreements with the Eurasian Economic Union. Together with expansion in the number of FTA agreements and in line with Russia’s WTO commitments, its average weighted import tariff has declined to less than 6%. The geographical patterns of Russia’s external trade shifted progressively towards Asia, with the volume of Russia-China trade surpassing the USD 100 bn mark in 2019.

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Expert Opinions

An important shift associated with the economic trends of 2019 was the pick-up in the de-dollarization of the Russian economy as demonstrated by the structure of the country’s foreign reserves and the currency denomination of its foreign trade with key partners. With respect to the structure of CBR reserves the share of the euro exceeded 30%, rising above the share of the US dollar which declined to less than a quarter of the total. At the same time the share of Chinese yuan increased by nearly 10 percentage points since 2018 to reach more than 14%. We expect the trends associated with the de-dollarization of Russia’s foreign trade to continue into 2020 as a growing number of Russian corporates and their partners abroad are opting to use alternatives to the US dollar in mutual settlements.

In the end, the year 2019 may be viewed as an important period of economic consolidation, which sets the conditions for a shift in gears – from the emphasis on macroeconomic stability to greater prioritization of higher economic growth. The attainment of low inflation and the accumulation of sizeable reserves against the backdrop of favourable changes in the external backdrop provides sufficient scope for Russia to allocate a channel more funds into stimulating the real sector of the economy. Ultimately, however, the game-changer in terms of the medium- to longer term growth trajectory will be the dynamics in productivity, with the scale of the differential between Russia and developed economies hardly improving throughout the past decade.

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Expert Opinions
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.