1september 2013investment research economics russia in 2013: growth moderates amid high inflation...

1September 2013 INVESTMENT RESEARCH

EconomicsRussia in 2013: Growth Moderates Amid High Inflation

Evgeny Gavrilenkov, Chief Economist

September 2013

INVESTMENT RESEARCH


Sluggish economic growth in 1H13, but there is a chance for a rebound in 2H13

Domestic demand weakened in 1H13, eroded by high inflation and high interest rates. Retail sales grew 5.9% and investments rose 6.7% in 2012. In 7m13, retail was up 3.8% and investment was reportedly down 0.7% y-o-y (in July alone, investment was up 2.5%). Both numbers should look better in 2H13 as inflation subsides and lending rates will slowly come down.

Economic growth decelerated largely because nominal private consumption, which in the past was fueled by rapidly expanding consumer lending, decelerated, as households are paying a rapidly growing proportion of their income on interest payments.

Apart from that, government interventions on money markets, which fueled devaluation expectations, had a negative impact on economic activity.

The CPI edged up 0.8% m-o-m in July. This compares with 1.2% a year earlier, bringing y-o-y inflation to 6.5% as of August 1, versus 6.9% at end June. Over the first 26 days of August, inflation was at 0.1%, versus 0.2% in the same period last year. Thus, y-o-y inflation slowed to 6.4%, from 6.5% at the beginning of the month. YTD inflation also slowed to 4.5%, versus 4.7% a year earlier. In our base case, y-o-y inflation will come down below 6% at end 2013.

We see GDP growing around 2.5% in 2013. Retail sales expanded 4.3% y-o-y in July and 3.8% in 7m13. Our forecast for annual consumption growth is around 4.0%, as we expect it to rebound in 2H13 as inflation decelerates. The investment statistics are biased: investment growth was too strong in 1Q12, which created a high-base effect. This effect will gradually evaporate by year end, and investment growth should accelerate in 2H13, bringing the annual figure to around 3.5%.


Industry stagnates amid decelerating domestic demand

Source: State Statistics Service, Sberbank Investment Research

90%

100%

110%

120%

130%

140%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Industrial output Seasonally adjusted

-10%

0%

10%

20%

30%

40%

50%

60%

-10%

-5%

0%

5%

10%

15%

20%

25%

Jan ’10 Jul ’10 Jan ’11 Jul ’11 Jan ’12 Jul ’12 Jan ’13 Jul ’13

Retail sales Manufacturing Imports (rhs)

Industrial output growth decelerating as generally expected, January 2006 = 100%

Retail, manufacturing and import growth, y-o-y



Basic sector dynamics (as well as GDP) have not been revised upward despite changes in wholesale trade

Source: State Statistics Service

-10%

-5%

0%

5%

10%

15%

Jan

’12

Feb

’12

Mar

’12

Apr

’12

May

’12

Jun

’12

Jul ’

12

Aug

’12

Sep

’12

Oct

’12

Nov

’12

Dec

’12

Jan

’13

Feb

’13

Mar

’13

Apr

’13

May

’13

Jun

’13

Jul ’

13

Wholesale trade, new Wholesale trade, old Basic sector growth


The wealthier the country, the slower the growth expected

Source: IMF

0

5,000

10,000

15,000

20,000

25,000

-5% 0% 5% 10% 15%

GD

P pe

r cap

ita, $

GDP growth, y-o-y

Russia Panama

Turkmenistan

Portugal

Czech Republic

Iran

EstoniaChile

Brazil


Russia’s indebtedness is low compared with peers

GDP per capita and gross public debt in East European countries and the FSU, 2012

GDP per capita and external debt in East European countries and the FSU, 2012

Source: State Statistics Service, Sberbank Investment Research Source: State Statistics Service, Sberbank Investment Research

Armenia

Azerbaijan

Kazakhstan

KyrgyzstanTajikistan

Turkmenistan

Uzbekistan

BelarusBulgaria

Croatia

Georgia

Hungary

LatviaLithuania

Macedonia

Moldova

Montenegro

Poland

Romania

Russia

SerbiaUkraine

SlovakiaCzech Republic

Slovenia

Estonia

0

5,000

10,000

15,000

20,000

25,000

0% 20% 40% 60% 80% 100%

GD

P pe

r cap

ita, $

Public debt, % of GDP

Armenia

Azerbaijan

Kazakhstan

KyrgyzstanTajikistan

Turkmenistan

Uzbekistan

Belarus Bulgaria

Croatia

Georgia

HungaryLatviaLithuania

Macedonia

Moldova

Montenegro

Poland

Romania

Russia

Serbia

Ukraine

SlovakiaCzech Republic

Slovenia

Estonia

0

5,000

10,000

15,000

20,000

25,000

0% 50% 100% 150% 200%G

DP

per c

apita

, $

External debt, % of GDP


The massive liquidity absorption by the Finance Ministry destabilized money markets in mid 2012, R bln

Note: Injection of liquidity (+), absorption of liquidity (–)Source: Finance Ministry, Central Bank, Sberbank Investment Research

-1,000

-800

-600

-400

-200

0

200

400

600

800

Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13

Budget balance (inversed) Deposits of Finance Ministry Net domestic borrowing

Q1 Neutral Policy Q2 Harmful sterilization

Q3 and Q4 Temporary relief

1H13liquidity injection


Credit rates grew in 2012 amid increased and domestic Sovereign borrowing, but both stabilized in 2013

Source: Central Bank, Finance Ministry

2,000

2,500

3,000

3,500

4,000

4,500

5,000

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

Jan

’11

Mar

’11

May

’11

Jul ’

11

Sep

’11

Nov

’11

Jan

’12

Mar

’12

May

’12

Jul ’

12

Sep

’12

Nov

’12

Jan

’13

Mar

’13

May

’13

Jul ’

13

Domestic Sovereign debt (rhs), R blnCredit rate, excluding SberbankCredit rate, total


Nominal interest rates: the margin between banks’ lending rates and their borrowing costs have narrowed

Source: Central Bank

0%

5%

10%

15%

20%

25%

2003 2005 2007 2009 2011 2013

1d MIACR Deposit rate Credit rate Refinancing rate


Real interest rates turned positive in 2012, but some moved back to negative territory as inflation accelerated


-15%

-10%

-5%

0%

5%

10%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

1d MIACR Deposit rate Credit rate Refinancing rate


Although external debt has grown, foreign debt payments are bearable, $ bln


0

100

200

300

400

500

600

700

800

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

Public debt Bank debt Non-bank debt

Total debt asof Jul 1, ’13

Demanddebt

3Q13 4Q13 1Q14 2Q14 3Q14 Over2

years

Schedule

undet

Noschedul

eTotal 703.9 36.7 20.6 20.9 14.5 15.0 16.5 318.0 24.0 16.6Public debt 75.1 3.1 2.1 0.3 1.2 0.3 0.8 37.0 0.5 9.0Bank debt 210.7 19.7 9.6 6.4 2.9 7.0 6.5 76.7 20.4 –Non-bank debt 493.2 13.8 10.2 14.2 10.4 7.7 9.2 204.3 3.1 7.6


The Central Bank and the Finance ministry intervene on the money markets jointly but without much coordination

Source: Finance Ministry, Central Bank Source: Central Bank

The Finance Ministry has become an important player on the money market, R bln

Since 2009, the forex market is more volatilethan the ruble money market as monetarypolicy has changed

-300

0

300

600

900

1,200

1,500

Jan ’11 Apr ’11 Jul ’11 Oct ’11 Jan ’12 Apr ’12 Jul ’12 Oct ’12 Jan ’13 Apr ’13 Jul ’13

Total actual Total scheduled Budget balance

0%

5%

10%

15%

20%

25%

30%

29

31

33

35

37

39

41

Jan ’07 Jan ’08 Jan ’09 Jan ’10 Jan ’11 Jan ’12 Jan ’13

RUB/ EUR-USD 1d MIACR (rhs)

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

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


The Central Bank has again increased long-term lending to banks against illiquid collateral in July 2013

Source: Finance Ministry, Central Bank

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13

Central Bank credit to banks via repo, R mln

Central Bank credit to banks excl. repo, R mln

Finance Ministry deposits, R bln

1d MIACR (rhs)


Oil price and domestic inflation are key determinants of the exchange rate moves in the long run

Source: Central Bank, Bloomberg, Sberbank Investment Research

20

22

24

26

28

30

32

34

40 50 60 70 80 90 100 110 120 130

RU

B/U

SD

Urals, $/ bbl

Jan 1, 2010-Oct 31, 2010y=-0.0933x+37.398

Nov 1, 2010-Aug 31, 2011y=-0.0974x+39.222

Oct 1, 2011-Sep 02, 2013y=-0.1172x+44.006

Jan 2003-Dec 2008y=-0.0792x+31.976


New equilibrium has yet to emerge

Source: Central Bank, Sberbank Investment Research, Bloomberg

27

28

29

30

31

32

33

34

60 70 80 90 100 110 120 130

RU

B/U

SD

Urals, $/ bbl

Jan 1, 2010-Oct 31, 2010

Nov 1, 2010-Aug 31, 2011

Oct 1, 2011-Apr 30, 2013

May 1, 2013-Sep 02, 2013

new equilibrium to emerge


Flat currency band looks unreasonable amid high inflation


27

30

33

36

39

42

Jan ’08 Jul ’08 Jan ’09 Jul ’09 Jan ’10 Jul ’10 Jan ’11 Jul ’11 Jan ’12 Jul ’12 Jan ’13 Jul ’13

Floating boundaries of bi-currency exchange rate RUB/ USD-EUR Bi-currency average rate


Internal regulations force the Central Bank to support the ruble if it moves away from the median of the band

Source: Central Bank, Sberbank Investment Research

-600

-300

0

300

600

-8%

-4%

0%

4%

8%

Jan ’12 Apr ’12 Jul ’12 Oct ’12 Jan ’13 Apr ’13 Jul ’13 Oct ’13

Central Bank interventions (minus=selling, plus=buying) (rhs) Deviation from bi-currency average rate


Central Bank refinancing banks and absorbing liquidity at the same time by buying forex

Source: Central Bank, Sberbank Investment Research

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

Jan ’13 Feb ’13 Mar ’13 Apr ’13 May ’13 Jun ’13 Jul ’13 Aug ’13 Sep ’13

Central Bank credit to banks via repo, R mlnCentral Bank credit to banks excluding repo, R mlnAccumulated Central Bank interventions, R bln (minus=selling)1d MIACR (rhs)


Real and nominal dynamics of major GDP components are different


Public consumption as % of GDP Public consumption and investments as % of GDP


14%

16%

18%

20%

22%

24%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Nominal prices 2008 prices

14%

16%

18%

20%

22%

24%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Public consumption Fixed capital investments


Private consumption and net exports as % of GDP


0%

10%

20%

30%

40%

50%

60%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Private consumption Net exports


Inflation accelerated in 2H12 amid moderate money supply growth, but should decelerate in 2H13

Source: State Statistics Service, Central Bank

0%

2%

4%

6%

8%

10%

12%

14%

16%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

M2 y-o-y Inflation (rhs) y-o-y


Annual inflation gradually returns to a more “normal” level as last year’s base effect evaporates

Source: State Statistics Service, Central Bank Source: State Statistics Service, Central Bank

Annual inflation versus refinancing rate Monthly inflation, m-o-m

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2011 m-o-m 2012 m-o-m 2013 m-o-m

2%

4%

6%

8%

10%

12%

14%

16%

Jan ’09 Jul ’09 Jan ’10 Jul ’10 Jan ’11 Jul ’11 Jan ’12 Jul ’12 Jan ’13 Jul ’13

CPI, y-o-y Refinancing rate


Utility tariff indexation has a limited impact on CPI, January 2009=100%


100%

110%

120%

130%

140%

150%

160%

Jan '09 Jul '09 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13

CPI Food Non-food Housing


Consumer lending grew too fast in 2011-12


Consumer credits still grow too fastConsumer lending expanded more than 40% in 2011 and early 2012, which also contributed to an acceleration in inflation, y-o-y

Data: January 2009-May 2013Source: State Statistics Service, Central Bank

-2%

-1%

0%

1%

2%

3%

4%

5%

3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0

Loan

gro

wth

, m-o

-mConsumer lending, R trln

10%

15%

20%

25%

30%

35%

40%

45%

50%

Jan ’11 Jul ’11 Jan ’12 Jul ’12 Jan ’13 Jul ’13

Corporate loans Retail loans Total loans


Bank credit/GDP ratios remain low and are set to rise, albeit moderately

Source: Central Bank, State Statistics Service

0%

10%

20%

30%

40%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Consumer crediting, % of GDP Enterpise crediting, % of GDP


Nominal consumption growth decelerates despite stable and even accelerating growth of nominal income…


Consumer credits and deposits, y-o-yNominal income and retail sales, y-o-y

0%

3%

6%

9%

12%

15%

18%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13

Nominal wages Nominal pensionsPaid services to the population Nominal retail sales


0%

10%

20%

30%

40%

50%

Jan ’11 Jul ’11 Jan ’12 Jul ’12 Jan ’13 Jul ’13

Consumer credits Consumer deposits


… as interest rate on consumer loans are too high


Totalincome

Income frombusiness activities

Wages, includinghidden wages

Socialpayments

Propertyincome

Otherincome

1Q12 100% 9.1% 66.0% 18.8% 4.2% 1.9%2Q12 100% 8.2% 64.9% 19.5% 5.4% 2.0%3Q12 100% 8.8% 65.0% 18.5% 5.7% 2.0%4Q12 100% 8.0% 68.5% 16.5% 5.0% 2.0%2012 100% 8.5% 66.2% 18.2% 5.1% 2.0%1Q13 100% 8.5% 66.2% 18.7% 4.7% 1.9%2Q13 100% 8.2% 65.9% 18.7% 5.2% 2.0%

<30d 31-90d 91-180d 181d-1y <1y >1y

Jan ’11 14.0% 19.5% 31.8% 30.4% 27.2% 17.5%Jul ’11 12.6% 15.5% 27.3% 25.9% 22.7% 17.3%Jan ’12 13.7% 15.7% 31.9% 27.6% 25.4% 17.7%Jul ’12 13.3% 16.3% 27.6% 26.1% 24.7% 19.0%Jan ’13 15.4% 16.8% 27.9% 25.1% 24.0% 20.8%May ’13 19.8% 16.1% 28.4% 26.5% 25.2% 20.1%

Individual loans, maturity

Nominal interest rates on retail loans

Household income structure


Interest paid on retail loans/income ratio started to grow exponentially

0%

1%

2%

3%

4%

2007 2008 2009 2010 2011 2012 1Q13

Source: Central Bank, State Statistics Service, Sberbank Investment Research


Population by age group, ’000 people, scenarios forecast


20,000

25,000

30,000

35,000

40,000

45,000

50,000

2002

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013E

2014E

2015E

2016E

2017E

2018E

2019E

2020E

0-19 20-39 40-59 >60


Consumption supported by consumer lending was a key driver of economic growth


Private consumption was a key driver of economic growth, but its share in nominal GDP did not increase

Consumer credit supported consumption


-20%

0%

20%

40%

60%

80%

100%

120%

-10%

-5%

0%

5%

10%

15%

20%

25%

1Q

02

3Q

02

1Q

03

3Q

03

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

Private consumption, y-o-y

Retail loans, y-o-y, average (rhs)

-10%

-5%

0%

5%

10%

15%

40%

45%

50%

55%

60%

65%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Private consumption, % of GDPPrivate consumption, y-o-y (rhs)


Even though outstanding consumer debt is low relative to GDP, a problem emerged, as interest rates are too high


Loans/GDP ratios are growingConsumer loan growth outstrips the expansion of corporate loans


0%

20%

40%

60%

80%

100%

120%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Retail loans, y-o-y, average

Corporate loans, y-o-y, average

0%

10%

20%

30%

40%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Retail loans, % of GDP Corporate loans, % of GDP


The budget will remain in good shape, but the fiscal rule being introduced is problematic

One of the risks associated with the idea of reintroducing the fiscal rule from 2013 and replenishing the State Reserve Fund is that the government plans to continue to borrow on the local market even in the case of a budget surplus. A “borrowed safety net” is costly and does not seem reasonable, as it crowds out other borrowers.

The budget ran a surplus in 7m13, but will most likely turn into a small deficit by year end. As rates are high, the government’s borrowing plans are well behind plan, implying limited possibility to replenish the State Reserve Fund this year. Ruble depreciation will keep the breakeven oil price relatively unchanged.

The breakeven price in 2012 was around $110/bbl. It is impossible to calculate the future breakeven price of oil accurately, as it depends not on budgetary expenditures alone but on revenues as well. The latter is a function of the exchange rate, which itself depends on the current oil price. Hence, the future breakeven oil price is a function of the future oil price, so modeling depends on statistically cofounding and unpredictable variables. Meanwhile, the flexible exchange rate policy makes the budget more resilient to external shocks.

Rebuilding the State Reserve Fund to up to 7% of GDP by 2015 has become the real objective (albeit elusive) of state macroeconomic policy. It looks as though the rule will either be modified or outright abolished, as it was not even applied de facto in 1H13.


Russia’s breakeven oil price has risen substantially in recent years but seems to have stabilized as the ruble started to float

Source: Finance Ministry, Sberbank Investment Research Source: Finance Ministry, Sberbank Investment Research

Budgetary policy was generous in the past decade, and the State Reserve Fund shrank in 2009-10 before returning to growth in 2011.

0

50

100

150

200

250

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$ b

ln

Stabilization Fund State Reserve Fund National Welfare Fund

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013E

$/b

bl U

rals

Breakeven oil price Oil price


The budget breakeven oil price is only a theoretical concept and is a function of the oil price itself, not expenditures alone

Source: Sberbank Investment Research

80

90

100

110

120

130

140

150

60 70 80 90 100 110 120 130 140

Brea

keve

n oi

l pric

e, $

/bbl

Ura

ls

( if

the

RU

B/U

SD rat

e is

fixe

d)

Oil price, $/ bbl Urals

2010

2011

2012


Case study: the trade balance would remain highly positive and the budget deficit would be limited if the oil price were to stay at $80/bbl

Note: Data from January 2007 to June 2013Source: Central Bank, Finance Ministry, Sberbank Investment Research

Source: Central Bank, Finance Ministry, Sberbank Investment Research

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

60 70 80 90 100 110 120 130 140

Bal

ance

, % G

DP

Oil price, $/ bbl Urals

2012

0

5

10

15

20

25

25 50 75 100 125 150

Trad

e ba

lanc

e, $

bln

Urals, $/ bbl


The budget may look better than the government expects, R bln

Source: Finance Ministry

2012 2013E 2014E 2015E 2016E

Total revenues 12,855.5 12,865.9 13,485.5 14,767.5 15,908.1Total revenues, % GDP 20.6 19.3 18.2 18.0 17.4Total expenditures 12,895.0 13,387.3 13,847.0 15,235.7 16,451.8Total expenditures, % GDP 20.6 20.1 18.7 18.6 18.0Balance -39.4 -521.4 -361.5 -468.2 -543.7Balance, % GDP 0.0 -0.8 -0.5 -0.6 -0.6Budget deficit financing sources 39.4 521.4 361.5 468.3 543.7

State Reserve Fund (replenishment) -703.8 -373.4 -377.7 -351.1 -368.4National Welfare Fund 0.0 5.9 9.4 10.8 12.4Other sources of funding of the federal budget deficit 743.2 888.9 729.8 808.6 899.7

Net local borrowing 511.4 448.6 532.8 443.9 643.6Borrowing 911.9 1,213.2 974.1 1,034.8 1,253.3Redemption -400.4 -764.6 -441.3 -590.9 -609.7Net external borrowing 18.1 52.1 102.5 48.7 134.0Other 213.7 388.2 94.5 316.0 122.1


Budget expenditures in 2013-16, R bln

Source: Finance Ministry

2013E 2014E 2015E 2016E

Total expenditures 37.6% 35.8% 35.4% 34.9%Federal issues 2.1% 2.0% 1.9% 1.7%National defense 3.2% 3.4% 3.8% 3.8%National security and law enforcement 3.2% 3.0% 2.8% 2.5%National economy 4.7% 4.5% 4.3% 4.2%Housing and communal services 1.7% 1.7% 1.6% 1.5%Environmental protection 0.1% 0.1% 0.1% 0.1%Education 4.3% 4.1% 4.0% 4.0%Culture and cinematography 0.6% 0.5% 0.5% 0.5%Health 3.7% 3.5% 3.4% 3.4%Social policy 12.8% 11.8% 11.3% 11.1%Physical culture and sports 0.3% 0.3% 0.3% 0.3%Media 0.2% 0.1% 0.1% 0.1%State and municipal debt servicing 0.7% 0.7% 0.7% 0.7%


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Co-Head of Sberbank CIB Ruben Vardanian, Alexander Bazarov

Chief Economist, Managing Director Evgeny Gavrilenkov


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1september 2013investment research economics russia in 2013: growth moderates amid high inflation...

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