Russia

EDB investment portfolio

01/05/2018

58 projects

$2 539.1 million

38.17% 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’s GDP growth in 2017 was positive and according to preliminary data stood at 1.5% after GDP declined in 2015-2016 by 2.8% and 0.2%, respectively.

The active recovery of economic growth observed in 2Q 2017 (GDP growth of 2.5% YoY), was replaced by a gradual slowdown in the second half of the year. According to the Federal State Statistics Service, in 3Q 2017 GDP increased by 1.8% YoY, and in 4Q 2017, according to preliminary estimates, GDP growth slowed to 1.2% YoY.

A high level of investment activity was observed in 2Q 2017 against a background of large infrastructure projects (6.3% growth of investments in fixed assets compared to the second quarter of 2016), but it slowed significantly in the second half of the year. According to the Federal State Statistics Service, the increase in investment in fixed assets in 3Q 2017 was 3.1% YoY, and the monthly investment activity indicators (production and imports of investment goods, and construction) indicate some slowdown in 4Q 2017.

The potential for investment growth is one of the main domestic factors supporting economic growth in the medium term. Support for investment activity may further come from a softening of monetary policy with reduced interest rates, increased effectiveness of government spending on infrastructure, and structural measures to increase labor productivity.

The growth in world commodity prices and the weakening of currency imbalances have had a positive impact on foreign trade flows. The annual increase in exports in real terms in 3Q was 4.5% (4.7% since the beginning of the year). At the same time, the volume of imports continued to show steady growth, having increased by 16.3% in 3Q (17.8% since the beginning of the year), which was facilitated by the recovery of domestic demand and the strengthening of the ruble.

An important achievement in 2017 was the restoration of trade between Russia and Eurasian Economic Union countries, including a reduction in the raw materials domination of Russian exports.

Along with the revival of investments and an increase in exports in 2017, the consumer sector stabilized and recovered. The annual increase in retail trade turnover accelerated in the 4Q to 3%, from a drop of 4.6% a year earlier. These trends were partly due to the growth of wages and the restoration of consumer lending.

Growth in industrial production in 2017 was rather restrained, slowing to 1% by the end of the year from 1.3% a year earlier. Restraining factors were the meeting of obligations within the framework of the OPEC+ deal and unstable demand for domestically produced intermediate and investment goods.

Agriculture remained the leading sector in terms of production growth in 2017. The annual growth in output was 2.4% (compared with 4.8% a year earlier). Despite unfavorable weather conditions, Russia managed to achieve record volumes in the export and harvest of grain in 2017 (134.1 million tons compared with 120.7 million tons a year earlier).

Leading indicators throughout 2017 signaled an increase in economic activity in Russia. In particular, the indicator calculated by the Eurasian Economic Commission showed a positive trend for 12 consecutive months and also testifies to the acceleration of economic activity in 1Q 2018. The PMI indicator for the manufacturing and services sectors did not fall below the threshold level of 50 in 2017 and averaged 55.5, its highest level since 2008.

Inflation

Inflation in Russia at the end of 2017 reached a historic low of 2.5%, compared with 5.4% at the end of 2016. The slowdown in inflationary processes was facilitated by the strengthening of the ruble, a large harvest and a decrease in inflationary expectations amid moderately tight monetary policy. At the same time, inflationary expectations, according to Central Bank estimates, remained at an elevated level throughout the year and accounted for the main risks of accelerating inflationary processes.

Exchange Rate

Over the past few years, the Russian economy’s dependence on oil prices and capital flows has declined, which was reflected, among other factors, in the stabilization of the ruble exchange rate in 2017. The decline in the correlation between the ruble exchange rate and oil prices to a record low level was noted by the Central Bank of the Russian Federation. The nominal exchange rate strengthened by 6.1% against the US dollar for the year.

According to our estimates, in 4Q 2017 the Russian ruble remained overvalued relative to its equilibrium value (the real effective rate gap is estimated at 3.8%).

The recovery in commodity prices has had a positive impact on the value of exports as compared to imports. The improvement in the trade balance was a determining factor in the increase in the current account surplus in 2017 to the level of USD 40.2 billion, which is more than 1.5 fold higher than the level of 2016.

The net capital outflow, according to the Bank of Russia, was USD 31.3 billion in 2017, which was USD 11.5 billion more than in 2016, and is primarily related to the banking sector’s operations to reduce external liabilities. Almost half (USD 14.7 billion) of the capital outflow occurred in 4Q, which may be due to lower interest rates and a change in the external conditions for the Russian economy (including rising energy prices).

Fiscal Policy

The recovery of oil prices during 2017 was reflected in the growth of oil and gas revenues in the federal budget (an increase of 23.3%). This was the main factor in reducing the budget deficit in 2017 to 1.5% of GDP, from 3.4% of GDP a year earlier. The expenditure part of the budget remained unchanged, despite a significant reduction in spending on defense (a decrease in 2017 by 24.4%, or RUR 923 billion compared with 2016).

Positive trends also include a decrease in the non-oil and gas budget deficit from 9.1% of GDP in 2016 to 7.7% of GDP in 2017. This indicator characterizes the vulnerability of the budget to a decline in oil prices.

Despite some success in reducing the reliance on commodity prices, it should be noted that such a trend is not yet firmly established. In this respect, Russia’s introduction in 2018 of a new budget rule limiting the excessive use of additional revenues from the export of raw materials during a favorable price environment will further reduce the economy’s dependence on raw materials.

The federal law “On the Federal Budget for 2018 and the Planning Period 2019 and 2020” includes a gradual reduction of the budget deficit by 2020 to the level of RUR 870 billion, or 0.8% of GDP. At the same time, in the event of raw materials prices remaining stable in 2018 at the level of the beginning of this year, the Ministry of Finance does not rule out a budget surplus for 2018 instead of the planned deficit of 1.3% of GDP.

An improvement in the economic situation and the maintenance of relatively high interest rates compared to developed countries contributed to Russia’s successful accessing of international capital markets in 2017. In June, the Ministry of Finance placed sovereign Eurobonds totalling USD 3 billion.

A program of domestic borrowing was implemented against a backdrop of steady demand for federal loan bonds in 2017. The volume of domestic government debt for 2017 grew by RUR 1.13 trillion and amounted to RUR 9.14 trillion at the beginning of January.

One of the potential factors behind the growth of corporate debt and capital inflows in 2018 may be the increase in Russia’s sovereign rating to investment grade.

Monetary Policy

Reaching the inflation target against a backdrop of continuing high inflation expectations required a moderately tight monetary policy throughout 2017 from the Central Bank. The gradual slowdown in inflationary processes was accompanied by a decrease in the key rate, which was reduced six times from 10% to reach 7.75% last year.

Assuming record low inflation in 2018, there are still opportunities for a further lowering of interest rates.

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:
1-st Zachatievskiy pereulok, house 3, block 1, Moscow, 119034, Russian Federation