The growth of the economy in 2018. Why oil prices have diverged from GDP
The increase in oil prices at the moment has no such significant effect on GDP growth as in the past. The impact of higher oil prices is largely manifested through the growth of revenues and expenditures budget. Now revenues are growing, but this does not lead to a substantial increase in costs. Thus, the increase in oil prices improves the fiscal performance, but has no significant effect on economic growth. In 2018, the budget rule formalizes the approach to budget policy, which the Ministry of Finance has used this year.
Inflation and Central Bank policy
We expect that inflation in Russia will remain low, and interest rates will gradually decline. Our prediction — the return of the annual inflation rate (to corresponding month of the previous year) to the target value of 4% in the second half of 2018, from 2.5% in December 2017. However, the average annual inflation (the average price level in 2018 compared to 2017) will probably be closer to 3 percent. From the point of view of the Central Bank, the risks of exceeding the inflation targets outweigh the risks of sustainable inflation deviation down, therefore, the Central Bank is very cautious approach to easing monetary policy. In our baseline scenario — a reduction of the key rate to 7% by the end of 2018.
From our point of view, a moderating influence on growth has, as structural constraints, and quite tight macroeconomic policy — the reduction of budget expenditures in real terms, and the still very high real interest rates. The government faces a difficult task: to find a balance in macroeconomic policies that will maintain macroeconomic stability without impeding growth.
The main risk for the Russian economy, from our point of view, the lack of reforms, as in this case, the pace of economic growth in Russia is likely to remain very low. With regard to external risks, from our point of view, compared to other emerging markets, Russia is less exposed to risks of rising world interest rates. Due to the surplus of the current account and the excess of foreign assets over liabilities, Russia is less dependent on foreign capital inflows than, for example, countries such as Turkey and South Africa.
We do not believe that the latest round of US sanctions will have a negative impact on the Russian economy in the short term, but of course there is a big uncertainty about how to execute all these measures, and what will be the reaction of the Russian government. This adds to the existing uncertainty and can have a negative impact on investment decisions and medium-term prospects for economic growth.
The Russian public debt net of liquid assets is very low, 10% of GDP. If the script is implemented sanctions against the Russian sovereign debt, the effect will depend on whether the sanctions apply only to new releases or existing releases. Sanctions on new releases, from our point of view, do not represent a particular problem, as the budgetary situation improved and the budget deficit is shrinking pretty quickly.
Next year, according to our estimates, the deficit will be moderate, if the price of oil will be in the range of $ 50-60 / barrel (our base-case forecast average price of Brent crude to $55 per barrel in 2018). If the ban will apply to all current debt, it will probably cause short-term turbulence on currency and bond markets markets, as non-residents held one third of government bonds. However, I do not see significant medium-term consequences for Russia. I think that the amount of debt will be absorbed by the domestic players, because we are talking about very low levels of debt. The Russian government still have assets and flexibility in adjusting expenditures, at least for the next few years.