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Summary of Emerging Markets Russia Report (21 November 2017)

Core Content

This report provides an analysis of Russia's economic and financial conditions as of November 2017, with a focus on growth, inflation, monetary policy, and fiscal and external accounts.

Main Points

Economic Growth

• Q3 Real GDP Growth: Disappointed at 1.8% YoY, down 0.7pps from Q2.
• Sectoral Performance: The slowdown was driven by the transportation and industry sectors, while strong retail trade and improving agricultural output supported growth.
• Demand Factors: Strong wage growth, improved consumer confidence, lower household savings due to declining real rates, increasing household credit, and falling inflation contributed to strong household demand.
• Corporate Profits: Corporate profits likely peaked in earlier quarters, supporting investment, though at a slower pace than Q2.
• Q4 Outlook: Current data suggests a mixed outlook for Q4, with weak retail sales and IP growth in October, but continued support from household demand.

Inflation Trends

• Headline Inflation: Fell to a new low of 2.7% YoY in October, below the consensus forecast.
• Core Inflation: Decelerated faster than expected to 2.5% YoY.
• Inflation Expectations: Increased to 9.9% in October, indicating high and volatile expectations.
• 2018 Outlook: Inflation is expected to trend back towards 4% due to base effects and stronger domestic demand, with a likely undershoot of 3% by year-end 2017.

Monetary Policy

• CBR Actions: The Central Bank of Russia (CBR) is expected to cut the key rate by 25bps in December to 8.00%, as inflation continues its downward trajectory.
• Future Easing: Further rate cuts are expected in 2018, likely skewed towards the first half of the year, with a pause in Q4-18 after a cumulative 150bps easing.
• Lending Conditions: Demand for loans declined in Q3 and is expected to continue declining in the next six months. However, household and corporate lending continues to improve.

Fiscal Policy

• Budget Deficit: The 2017 deficit is expected to be 2.1% of GDP, with a further reduction to 1.4% in 2018.
• Funding Sources: Deficit financing is expected to come mainly from domestic sources, with a declining share of external debt.
• Government Debt: Public debt remains relatively low at 10.3% of GDP, and non-resident holdings of OFZs are at a record high.

External Accounts

• Current Account: Deteriorated in Q3 but posted a small surplus, with trade balance continuing to decline.
• Financial Flows: Improved sharply, supporting reserve accumulation.
• FX Reserves: At $341.4bn as of October 2017, one of the highest in EM.
• Ruble Weakness: The ruble continues to weaken, with RUB/USD at 59.63 as of 20 November 2017.

Key Indicators

Upcoming MPC Meetings

Divergence Between Wage and Disposable Income Growth

• Real wages have grown since 2016, but real disposable income growth has lagged, with the gap widening.
• Disposable income growth has been negatively impacted by government cuts in social security payments and higher taxes.
• A spike in disposable income in January 2017 was due to increased pension payments, which have since subsided.

Bank Sector Overview

• Interest Rates: Individual loan rates continue to decline.
• Net Interest Margins: Broadly stable.
• FX Exposure: At record low levels.
• NPLs: Stabilized.
• Lending Trends: Lending to households and corporates is improving, leading to a slight increase in the loan to deposit ratio.

Risk and Disclosure Notes

• Conflict of Interest: Deutsche Bank's research is independent, but analysts may have financial interests in the products and services they cover.
• Investor Advisory: The report is not an investment recommendation and should not be relied upon for investment decisions.
• Disclosures: Available on the Deutsche Bank website under the "Disclosures Lookup" and "Legal" tabs.
• Risk Factors: Include macroeconomic fluctuations, FX risk, and derivative risks. Investors are advised to seek expert legal and financial advice.