Valdai Club

The key policy themes for 2020 will revolve around the implementation of National projects, with expectations from the government pointing to the peak in the related fiscal spending being reached in 2020-2021. Our view is that with the more coherent implementation of the National projects (particularly in terms of the coordination between the federal government and the regional administrations) the growth effects of public spending may increase raising the rate of economic expansion next year closer to 2%. Another important development next year will be the allocation of part of the National Wellbeing Fund in excess of the 7% of GDP threshold to fiscal spending. In case this involves the conversion of hard-currency to roubles on the open market this may exert additional pressure on the rouble to appreciate. 

In the monetary policy sphere the challenge for the CBR will be to get a firmer handle on inflation dynamics and align more closely it forecasts and targets with actual inflation dynamics. The weakness in inflationary dynamics and the decline in inflation to less than 3% in the course of 2020 may be more of a reflection of the weakness in demand, which raises the question of how demand is likely to be supported next year. Our view is that the macroeconomic policy mix will increasingly involve greater fiscal loosening with monetary policy stimulus remaining restrained.

The appreciation of the rouble observed in 2019 may have further scope to unfold in 2020 on the back of the sale of forex from the National Wellbeing Fund to finance projects in the domestic economy as well as the likely persistence of capital inflows into Russia’s assets on the back of macroeconomic stability. The decline in oil prices that is likely in 2020 will not be a paramount factor for the rouble, given the pre-eminence of capital flows in affecting the rouble exchange dynamics.   

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, 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.

 The defining factor on the external front for Russia in 2020 will be growth performance of the global economy, with the IMF reducing the growth projection for the world to the lowest rise since the 2008-2009 financial crisis. A lot will be riding on the state of the consumer, as both in the US and globally there is a significant gap between the relatively high consumer confidence indicators and the negative signals from the manufacturing sector of the economy as demonstrated by the PMI and industrial indicators. Could the duality between the consumer and investment as well as the services vs manufacturing performance hold out much longer or could the consumer sector ultimately succumb to the weight of the mounting growth concerns? Our view is that while a further global slowdown is likely, the base-case assumes a moderate decline in growth rates without hard landing.

In terms of potential “black swans” for next year political instability across Latin America that has escalated throughout 2019 could be one of the potential triggers of broader economic EM volatility in case political tensions persist. Also, China’s economic growth performance as well as the evolution of its relations with the US will have a significant bearing on Russia’s risk profile next year.