Slide 1 | April 2010 | Russian Economy: Looking for More Balanced Growth | Evgeny Gavrilenkov, Chief Economist Russia: Uneasy Growth Amid Budgetary and

Slide 1 | April 2010 | Russian Economy: Looking for More Balanced Growth | Evgeny Gavrilenkov, Chief Economist

Russia: Uneasy Growth Amid Budgetary and Institutional Constraints

April 2010Evgeny Gavrilenkov, Chief Economist


Russia’s growth model should undergo uneasy transformation amid institutional constraints

Russia’s growth is moderating after a period of overheating and excessive borrowing. Nonetheless, growth is expected to be strong this year – we expect Russia’s GDP to expand around 5% and our outlook hasn’t changed since mid 2009.

The Statistics Service is now transitioning to a new base year, which means that data for 2010 and preceding years are often incompatible and thus should be treated cautiously. Statistical errors were already too high last year, which means that even last year’s numbers “are under suspicion”.

Last year’s economic performance may have been better than the Statistics Service reported, as monetary and financial indicators, which indirectly point to where the economy is going, look very encouraging since 2Q09 (including January-February 2010).

Russia didn’t face any serious budgetary constraints, but rather institutional constraints – a challenge that has broader recognition within the ruling elite. Hopes for slow institutional transformation rose as inflating growth via easy money becomes increasingly difficult.


Rising oil price and expanding foreign borrowing failed to accelerate Russia’s growth: Russia can grow at any oil price

Source: State Statistics Service, Troika estimates

-9%

-6%

-3%

0%

3%

6%

9%

12%

0 20 40 60 80 100

$/ bbl Urals

GD

P gro

wth

, y-o

-y 1999

2007

20090

100

200

300

400

500

600

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

0%

6%

12%

18%

24%

30%

36%

Public debt Private debt Private debt/GDP (rhs)



100%

120%

140%

160%

180%

200%

220%

2003 2004 2005 2006 2007 2008 2009 2010 2011

50

130

210

290

370

450

530

Retail, Jan '03 = 100% Foreign debt, $ bln (rhs)

Retail was booming due to foreign borrowing

Source: State Statistics Service, Central Bank, Troika estimates

Acceleration due to borrowing


After a short correction a year ago, consumption is rising steadily amid shrinking household debt


90%

100%

110%

120%

130%

140%

150%

Jan ’08 Jul ’08 Jan ’09 Jul ’09 Jan ’10

2,600

2,800

3,000

3,200

3,400

3,600

3,800

Retail, Jan'08 = 100% Retail, seasonally adjusted

Credits, R bln (rhs)

75%

100%

125%

150%

175%

200%

225%

250%

Feb Mar

Apr Ma

Jun

Jul

Aug

Sep Oct

Nov

Dec Jan

Feb Mar

Apr Ma

Jun

Jul

Aug

Sep Oct

Nov

Dec Jan

Feb' 04-Jan' 06 Feb' 08-Jan' 10

Growth accelerated amid excessively rapid expansion of credit



Russia is returning to more a balanced model of economic development after several years of overheating


1999

1989

2009

1961

1992-15%

-10%

-5%

0%

5%

10%

15%

10% 15% 20% 25% 30% 35% 40%

Investments/GDP

GD

P, y-o

-y


Industrial output has been recovering m-o-m since February 2009, however statistical errors (transition to a new base year) are too significant to be ignored


80%

100%

120%

140%

160%

2003 2004 2005 2006 2007 2008 2009

Industrial output Seasonally adjusted

70%

80%

90%

100%

110%

120%

130%

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10-20%

-15%

-10%

-5%

0%

5%

10%

Y-o-Y (rhs) Industrial output, Jan' 08 = 100%



“But actually, he thought as he re-adjusted the Ministry of Plenty’s figures, it was not even forgery. It was merely the substitution of one piece of nonsense for another” (George Orwell, Nineteen Eighty-Four)


Retail Services Householdconsumption

Real disposableincomes

Realwages

1Q08 17.2% 7.4% 14.6% 7.5% 13.4%2Q08 14.9% 5.4% 12.1% 5.7% 12.5%3Q09 15.0% 5.1% 11.2% 4.5% 12.2%4Q08 8.7% 1.8% 6.2% -6.9% 5.0%2008 13.5% 4.8% 10.7% 1.9% 11.5%

1Q09 -0.1% -0.9% -2.6% 0.4% -0.8%2Q09 -5.6% -4.7% -7.5% 3.1% -3.9%3Q09 -9.2% -6.4% -10.8% -2.9% -5.2%4Q09 -6.1% -4.4% -9.4% 7.0% -1.0%2009 -5.5% -4.3% -7.7% 1.9% -2.8%


Russia is returning to growth in 2010 amid falling inflation, which creates a new platform for economic performance in the years to come

Inflation fell to 6.5% y-o-y in February 2010 with good chances to stay around 6.0% for the year as a whole. More rate cuts are expected. A lower cost of borrowing is supposed to be a new platform for more diversified growth (as opposed to continuous attempts to modernize the economy based on a “hands-on” approach, which produces inefficiencies economy wide and ousts potentially more efficient businesses).

On the back of rapidly growing budget expenditures, inflation remained high in preceding years, while the former did not encourage economic growth. Russia needs to avoid sovereign borrowing to secure growth. In the current environment, Russia’s least important need is to set up a proper benchmark for the bond market. Sovereign borrowing, if it occurs (amid a $75-80/bbl oil price environment!), will also establish a new “benchmark” for public spending and increase the budget’s dependence on the oil price even more, which will elude a market benchmark.


A larger government and a budget deficit in Russia usually means worse economic performance

Source: State Statistics Service, Finance Ministry, Troika estimates

-16%

-12%

-8%

-4%

0%

4%

8%

12%

30% 33% 36% 39% 42% 45% 48%

Public expenditures/ GDP

GD

P, y

-o-y

1992 1994

1997

1998

2000

2002

2006 2007

2009

-15%

-10%

-5%

0%

5%

10%

15%

-15% -10% -5% 0% 5% 10%

Budget balance, % of GDP

GD

P gr

owth

, y-o

-y

1993

1997

2009

2010

2005

2000

Source: State Statistics Service, Finance Ministry, Troika estimates


The government expects budget revenues to fall, R bln...

Note: The government initially forecasted revenues in 2009 at R6,713.8 bln.Source: Finance Ministry

2005 2006 2007 2008 2009 2010E 2011E 2012E

Total revenues 5,127 6,276 7,779 9,274 7,337 6,950 7,456 8,070Profit tax 378 510 641 761 195 – – –Social tax 268 316 405 507 510 – – –VAT 1,472 1,511 2,262 2,132 2,050 – – –Raw materials extraction tax 855 1,094 1,123 1,605 982 – – –Export duties 1,352 1,896 1,835 2,859 2,042 – – –Import duties 271 342 488 626 467 – – –Other 533 608 1,026 784 1,091 – – –


… but has not cut expenditures, R bln

Note: The government initially planned expenditures in 2009 at R9,845.2 bln.Source: Finance Ministry

2005 2006 2007 2008 2009 2010E 2011E 2012E

Total expenditures 3,514 4,281 5,983 7,567 9,637 9,887 9,390 9,681State administration 501 530 812 835 829 1,087 – –National defense 581 682 832 1,041 1,188 678 – –National security 450 550 667 836 1,005 727 – –National economy 249 345 693 1,025 1,651 1,366 – –Housing sector 7 53 295 130 152 103 – –Education 162 212 295 355 418 386 – –Medical care, sport 88 148 197 278 352 325 – –Social policy 178 201 214 294 324 329 – –Transfers 1,246 1,499 1,900 2,675 3,594 3,725 – –Other 52 62 79 99 125 1,160 – –


Budget revenues will exceed target in 2010

Source: Economics Ministry

Source: Finance Ministry, Troika estimates

Official forecasts Oil and gas revenues/oil price ratio

2009Preliminary forecast Current forecast

Urals, $/ bbl 61.00 58.00 65.00GDP, R bln 39,016 43,187 43,137GDP, y-o-y -7.9% 1.6% 3.1%RUB/ USD, average 31.80 33.90 28.30CPI, December, y-o-y 8.8 10.0 6.5-7.5

2010E

0

50

100

150

200

250

Jan

’06

Apr

’06

Jul ’

06

Oct

’06

Jan

’07

Apr

’07

Jul ’

07

Oct

’07

Jan

’08

Apr

’08

Jul ’

08

Oct

’08

Jan

’09

Apr

’09

Jul ’

09

Oct

’09

Jan

’10


Historical exchange rate and oil price

20

24

28

32

36

40

20 40 60 80 100 120 140

Urals, $/ bbl

RUB/

USD

Exchange rate regime since February 2009


In uncertain times, economic performance depends on government policy more than ever before – both in Russia and worldwide

As the global economy is no longer “overheating”, Russia is forced to adjust to the new environment. Disinflation helps to restore confidence in the ruble and get rid of the sort of currency board regime it has implicitly implemented since 1999. Money is gradually becoming more “endogenous” amid declining borrowing costs and more regular Central Bank refinancing of commercial banks. The ruble will keep appreciating, albeit with volatility.

In contrast with monetary policy, which has improved significantly since the Central Bank abandoned exchange rate targeting in February 2009, fiscal policy is expected to become less generous in 2010. For the first time ever, expenditures are not expected to rise in 2010 and beyond – a major disinflationary factor. Fiscal performance this year is expected to be better than was planned by the government due to higher oil prices and better economic performance. The federal budget deficit in 2010 won’t exceed the size of the Reserve Fund (unless expenditures are amended).


M2 declined in nominal terms, but started to rise since February 2009, a sign that the economy is recovering (R bln); a sort of “currency board” regime is seemingly over: money is becoming endogenous ($ bln)

Source: Central Bank, Troika estimates

5,000

7,000

9,000

11,000

13,000

15,000

17,000

J an ’06 J an ’07 J an ’08 J an ’09 J an ’10 J an ’11

64%

66%

68%

70%

72%

74%

76%

M2 Deposits/M2 (rhs)

0

200

400

600

800

Jan’05

Jul’05

Jan’06

Jul’06

Jan’07

Jul’07

Jan’08

Jul’08

Jan’09

Jul’09

Jan’10

Jul’10

Jan’11

Gross international reserves, $ bln M2, $ bln

Source: Central Bank, Troika estimates


The ruble has appreciated since February 09 after the CBR stopped targeting the exchange rate, which became more volatile; the Central Bank’s role as lender of last resort grew in importance

Source: Central Bank

27

30

33

36

39

42

Jan’08

Apr’08

Jul’08

Oct’08

Jan’09

Apr’09

Jul’09

Oct’09

Jan’10

RUB/USD-EUR The bottom for the devaluation

0%

8%

16%

24%

32%

2006 2007 2008 2009 20100

200

400

600

800

Repo operations, R bln (rhs) 1-day MIACR Repo rate



29

31

33

35

37

39

41

01/2007 07/2007 01/2008 07/2008 01/2009 07/2009 01/2010 07/2010

0%

5%

10%

15%

20%

25%

30%

RUB/EUR-USD 1 1d MIACR (rhs)

Two regimes of targeting: currency first, money market second


Volatility high on the money market, low on the forex market

Volatility high on the forex market, low on the money market


Central Bank absorbed previously extended loans, R mln


0

1,000,000

2,000,000

3,000,000

4,000,000

Jan

’08

Fe

b ’0

8M

ar

’08

Ap

r ’0

8M

ay

’08

Jun

’08

Jul ’

08

Au

g ’0

8S

ep

’08

Oct

’08

No

v ’0

8D

ec

’08

Jan

’09

Fe

b ’0

9M

ar

’09

Ap

r ’0

9M

ay

’09

Jun

’09

Jul ’

09

Au

g’ 0

9S

ep

’09

Oct

’ 09

No

v ’0

9D

ec

’09

Jan

’ 10

Fe

b’ 1

0

0

200,000

400,000

600,000

800,000

Total credits to banks, R mln REPO (rhs)


Inflation is falling in any case

Source: State Statistics Service, Troika estimate

0%

5%

10%

15%

20%

Jan ’08 Jul ’08 Jan ’09 Jul ’09 Jan ’10 Jul ’10

y-o-y 6m average


Nominal interest rates have started to decline…

Source: Central Bank, State Statistics Service

0%

5%

10%

15%

20%

25%

2003 2004 2005 2006 2007 2008 2009 2010

1-day MIACR Deposit rateCredit rate Refinancing rate


… but real rates grew due to deceleration of inflation


Based on y-o-y inflation Based on 6m moving average inflation

-15%

-10%

-5%

0%

5%

10%

2003 2004 2005 2006 2007 2008 2009 2010


-20%

-15%

-10%

-5%

0%

5%

10%

15%

J an'08

Apr'08

J ul'08

Oct'08

J an'09

Apr'09

J ul'09

Oct'09

J an'10



Documents

Slide 1 | April 2010 | Russian Economy: Looking for More Balanced Growth | Evgeny Gavrilenkov, Chief Economist Russia: Uneasy Growth Amid Budgetary and