Russia

EDB investment portfolio

01/02/2018

55 projects

$2 624.1 million

41.60% of the total


Russia is a founder and the largest member of Eurasian Development Bank, holding two thirds of its charter capital (US $1 billion).

Trends

GDP

Russia demonstrated a steady recovery in economic growth in April-August 2017. According to the Federal Service for State Statistics (Rosstat), economic growth in 2Q 2017 was 2.5% y-o-y (vs. 0.5% y-o-y growth in 1Q 2017). Preliminary estimates of the Ministry of Economic Development indicate that the high rate of economic growth continued in July and August (with y-o-y growth of 1.8% and 2.3%, respectively). As a result, GDP growth in January-August 2017 is estimated at 1.7% y-o-y. These trends prompted a certain upward revision of the GDP growth forecast for 2017.

Two of the chief drivers of economic growth in 2Q 2017 have been improvements in investment activity and a recovery in inventory reserves. According to Rosstat, investments in fixed assets in 2Q 2017 increased by 6.3% y-o-y (vs. a 2.3% increase y-o-y in 1Q 2017). This positive trend received a great deal of support from the implementation of investment projects including the Kerch Bridge and the Power of Siberia gas pipeline. The expectations of growing demand for products in the manufacturing industry caused an increase in their inventories in 2Q 2017. As a result, the total growth in gross accumulation in 2Q 2017 was 14.8% y-o-y (vs. a 0.1% increase y-o-y in 1Q 2017).

After the dissipation of the effect of one-time factors in Q2 2017, investment activity in 3Q 2017 continued to receive support from the construction industry, which demonstrated annual growth of more than 7% in July-August. This trend can be attributed to more active mortgage lending against the backdrop of a gradual decline in the cost of credit resources.

The continuing increase in retail sales recorded in April - August (from 0.4% y-o-y in April to 1.9% y-o-y in August) against the background of growth in real incomes and lending is an indication of a steady recovery in consumer demand.

The slowdown in manufacturing industry growth in July-August to 1.1-1.5% after 3.5% y-o-y growth in 2Q against the backdrop of increasing inventories could be an indication that demand is recovering at a somewhat slower pace than manufacturers expected in 2Q 2017. In January-August 2017, manufacturing industry output increased by 1.9% overall from the comparable period in 2016 (up 1.3% from the year before). The rescheduling of harvesting operations due to adverse weather conditions resulted in somewhat volatile trends in agriculture (growth in the summer months varied from -2.9% y-o-y to 4.7% y-o-y). In January-August 2017, agricultural output increased by 1.5% overall from the comparable period in 2016 (up 4.7% from the year before).

According to leading indicators calculated by the Eurasian Economic Commission, economic activity is not expected to increase in the late 3Q – early 4Q 2017. Virtually all components of the headline leading indicator, which incorporates the external, domestic, and financial sectors of the economy, signal that the situation will remain unchanged.

Inflation

The annual inflation rate in September slowed to a historic low of 3%. The gradual reduction in July-September 2017 below the 4% Central Bank target resulted from the considerable reduction in fruit and vegetable prices following a good crop and a slight shift in seasonal factors. Trends in the rouble exchange rate and the gradual reduction in inflationary expectations also had a restraining effect on the level of prices during the period. The Central Bank estimates that inflationary expectations remain at a high level and create the key risk of an acceleration in inflationary processes. The inflation rate is expected to remain below 4% until the end of 2017 under the effect of the above-mentioned factors.

Exchange Rate

The devaluation of the Russian rouble in the second half of June was followed by a period of its stabilization (July-August) at fairly high levels recorded in 2017 and the strengthening of the rouble in September on the back of rising oil prices despite the capital outflow recorded in September.

According to our estimates, the Russian rouble remained overpriced in 3Q 2017 compared to its equilibrium trajectory (the gap between the official and real effective exchange rate is estimated at about 3.5%). As a result, conditions for a moderate devaluation of the Russian currency persist on the market.

The current account demonstrated a somewhat volatile trend in June-September, which can be attributed to changes in global prices for the primary commodities exported by Russia and the growing imports of services. The current account surplus in January-September 2017 was USD 26.6 billion (vs. USD 15.3 billion in the comparable period of 2016), according to preliminary estimates of the Bank of Russia.

The continued interest on the part of international investors in Russian securities translated into a net inflow of capital in June-August 2017 in the amount of some USD 7.5 billion, according to Central Bank estimates. However, the Central Bank has estimated capital outflows in the first nine months of 2017 at USD 21 billion, which indicates an abrupt increase in capital exodus in September by some USD 8.9 billion and can be attributed to volatility in the Russian banking sector.

Fiscal Policy

The federal budget deficit in January-August 2017 amounted to RUB 404 billion, or 0.7% of GDP (vs. a deficit of RUB 1,445 billion, or 2.7% of GDP, in the comparable period of 2016). Growing oil and gas revenue on the back of higher oil prices has been one of the primary factors behind the improvement in the budget balance in 2017 compared to 2016. As a result, after the first eight months of the year Russia had a considerable reserve (of some RUB 1.5 trillion) for an increase in budget spending in order to reach the budget deficit target of RUB 1.9 trillion, or 2.1% of GDP, by the end of the year. An expansionist fiscal policy in the remaining months of 2017 will additionally support the recovery in economic activity.

Russia’s international bond debt increased by USD 3 billion in June-August. This follows the offering of Russian sovereign eurobonds with maturity periods of 10 and 30 years by the Ministry of Finance. Ten-year bonds worth USD 1 billion came with a 4.25% yield, while thirty-year bonds worth USD 2 billion came with a 5.25% yield. Taking into account debt repaid to former Comecon member states, foreign debt as of the beginning of September amounted to USD 51.1 billion (vs. USD 48.5 billion as of early June 2017).

The domestic borrowing program is being implemented successfully against the background of a steady growth in demand for federal treasury bonds. Domestic public debt in June-August increased by RUB 260 billion (or by RUB 737 billion since the beginning of 2017) to RUB 8.74 trillion as of the beginning of September.

Monetary Policy

After the growth in inflationary pressure recorded in June, the Russian Central Bank suspended its policy of benchmark interest rate cuts in July, which was accompanied by tougher rhetoric from the regulator and more moderate market expectations as to the short-term prospects of interest rate cuts. Monetary conditions were further relaxed in September. With the inflation rate decreasing below the target, the Central Bank lowered the interest rate by 0.5 percentage points to 8.5% from September 18. The restrained interest rate cuts are attributable to what the Central Bank believes to be high inflationary expectations.

EDB’s investment activities in Russia in 2013-2017 included the following:

  • The Bank tries to support Russia in solving one of its priority tasks to improve national competitiveness and labour productivity, as well as to create conditions for the efficient development of domestic and external markets as envisioned by the Main Areas of Activities of the Government of the Russian Federation until 2018.
  • The Bank will focus on financing major infrastructure projects in the power sector, transport and communications, as well as non-primary sectors with high added value, including those aiming to reduce energy consumption and introduce resource and energy saving technologies and innovations in agriculture.
  • One of the main tasks set by the government is to improve the investment climate and the country’s attractiveness for foreign investors. To this end, the Bank will continue to extend technical assistance to set up an international financial centre in Moscow.

St. Petersburg Branch

Address:
7 Paradnaya St., Saint Petersburg, 191014, Russian Federation

Moscow Representative Office

Address:
Entrance №9, office building №3, 12, Krasnopresnenskaya embankment, Moscow, 123610, Russian Federation