99273 Russia Monthly Economic Developments August 2015  Russia’s economy contracted 4.6 percent in the second quarter, year -on-year, after a 2.2 percent contraction in the first quarter, but in June the pace of contraction slowed.  Russia’s second quarter balance of payment remained stable despite a weaker trade balance as the current account improved and capital outflows moderated.  Receding oil prices and a further cut in the key policy rates in July brought the ruble exchange rate down to its lowest level since February.  Preliminary poverty statistics for the first quarter of 2015 show a significant increase in the number of poor people. Russia’s economy contracted 4.6 percent in percent seasonally adjusted monthly growth. Real the second quarter, year-on-year, after a 2.2 disposable income dropped in June by 3.5 percent contraction in the first quarter. This percent, year-on-year, but less than the -6.5 remains broadly in line with the World Bank percent in May. quarterly projections and other analysts’ Global second-quarter trends point to an forecasts. However, the decline in real GDP by increasingly challenging environment for about 3.3 percent in the first half of the year exports. Although the strong dollar is weighing on was accompanied by a larger than expected contraction in exports, second-quarter growth in the United States was consumption due to the continued sharp fall in real incomes strong and accompanied by improvements in labor market and wages in the second quarter while unemployment was conditions, as a result of which the Federal Reserve is expected below projections (5.7 percent seasonally adjusted in June). to start gradually increasing policy interest rates in coming Persistently high credit costs for Russian firms and renewed months. In the Euro Area, despite renewed economic and uncertainty stemming from temporary flare-ups in geopolitical financial stress in in its periphery, growth is firming. The tensions combined with increasing global economic and European Central Bank’s quantitative easing program is financial stress contributed to continually weak investment playing an important role in improving credit conditions and demand. The result was an accelerating and broad-based the weaker euro is underpinning manufacturing activity and contraction of economic activities in the second quarter. exports. While growth in China in the second quarter was In June the pace of economic contraction slowed, yet remains stronger than market expectations, activity in other emerging constrained by continued weakness in domestic demand. and developing countries remained weak, struggling to gather Contraction in industrial output slowed in June to 4.8 percent, pace (in Mexico, and Indonesia) or turning negative (in the year-on-year, from -5.5 percent in May. Output contraction Philippines, Korea, and Thailand) with the June PMI data slowed in all base sectors, including in manufacturing where pointing to further softness. Lingering weakness reflects the output decreased by 6.6 percent, compared to -7.2 percent in ongoing adjustment by commodity-exporting economies to May. The moderate improvement was largely driven by a 3.9 lower commodity prices (e.g. Russia); domestic factors percent expansion in food production in June, year-on-year, including governance challenges (e.g. Brazil) and mining sector compared to a 1.5 percent contraction in May. Manufacturing strikes and power shortages (e.g. South Africa); and a industries that target investment goods performed less challenging external environment for exports, particularly for strongly in June with major sub-industries such as machine Asia’s manufacturing-oriented economies (e.g. Malaysia, building and transportation continuing to report double digit Thailand, Philippines, Singapore, and India). Competitiveness contractions. While fixed investment dropped by 7.1 percent, pressures related to the weaker yen and soft demand from year-on-year, compared to -7.6 percent in May it was slightly China weighed on exports as well as globally weak domestic less that the -8.8 percent in the first quarter. June high- demand, reflected in large contractions in imports since the frequency data confirm still depressed consumer demand, start of the year. Global equity flows are also down due to a with retail trade dropping by 9.4 percent in June, compared to sharp drop in flows to China, mirroring the 30 percent plunge -9.2 percent in May. However, real wage contraction levelled of its stock markets since mid-June amid concerns for a at 7.2 percent, year-on-year, from around -10 percent in disorderly correction with spillovers affecting global financial March-April and -7.4 percent in May, corresponding to 1.2 stability and confidence despite continued policy actions. RUSSIAN FEDERATION Monthly Economic Developments – August 14, 2015 Figure 1: The pace of economic contraction slowed … (percent Figure 2: … as real wages and income contraction decelerated change, y-o-y) (percent change, y-o-y) 20 15 income: real wages industrial production income: real disp. income 15 manufacturing 10 expenditures: retail trade retail trade expenditures: services 10 fixed investment 5 5 0 0 -5 -5 -10 -10 Jan-12 Jan-13 Jan-14 Jun-15 -15 Jan-2013 July Jan-2014 July Jan-2015 Source: Rosstat, Haver Analytics, World Bank team Source: Rosstat, Haver Analytics, World Bank team Источник: Росстат, Haver Analytics, команда Всемирного Russia’s second quarter balance of payment remained stable States reported in July a rise in the drilling rig count by 36 rigs despite a weaker trade balance as the current account to 664. The downward price pressure was also supported by the improved and capital outflows moderated. Lower oil and gas agreement with Iran over its nuclear program (potentially exports weakened the trade balance to US$44.1billion in the increasing supply by 0.5 million barrels per day by 2016). On the second quarter compared to US$51.7billion a year ago. Yet the demand side, weakening Chinese activity and the strengthening current account improved from US$12.1 billion to US$19.2 of the dollar contributed to the price decline. billion due to two main factors: a higher investment income Receding oil prices and a further cut in the key policy rates in balance benefited from lower payments abroad as the economy July brought the ruble exchange rate down to its lowest level entered recession and external debt decreased while a higher since February. In July the ruble average exchange rate balance of services was the result of less tourism abroad. Net depreciated by about 5 percent against the dollar, month-on- capital outflows decreased to US$15.3 billion from US$23.3 month. Mounting depreciation pressure led the Central Bank of billion in the first quarter of 2015. Russia (CBR) to stop on July 29 its program of daily purchases of Weak global demand and a persistent supply glut resulted in US$200 million to replenish its foreign currency reserves which oil prices slipping further in July-August. Energy prices fell it started in mid-May and to cut the key policy rates by 50 basis almost 10 percent in July driven mainly by the continuing points on July 31. Due to the continued downward adjustment decline in oil prices. Crude oil prices reached US$46 per barrel in oil prices in the first half of August the ruble depreciated by in early August, close to the lowest January levels. The supply another 6 percent against the dollar, to its lowest level since glut appears to grow: OPEC output rose in July to over 31 million February 2015. barrel per day−the highest level since 2008and the United Figure 3: Oil prices continued to edge down … Figure 4: … and the Ruble slid close to February levels USD/barrel count 30 120 1800 40 1600 100 50 1400 80 60 Brent 1200 60 WTI 70 US Oil Rig Count (right scale) 1000 80 40 800 90 20 600 Jan-14 Mar-14 Apr-14 May-14 Jul-14 Mar-15 Apr-15 May-15 Feb-14 Jun-14 Oct-14 Jan-15 Feb-15 Jun-15 Jul-15 Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Ruble/US$ Ruble/Euro Ruble/Dual cur. basket Source: Bloomberg, Bakes Hughes, and World Bank Source: CBR RUSSIAN FEDERATION Monthly Economic Developments – August 14, 2015 The annual indexation of utility tariffs led to a temporary revenues remained nearly unchanged at 10.6 percent of GDP inflation increase in July. The 12-month Consumer Price Index (10.1 percent in June 2014) thanks to strong corporate income increased to 15.6 percent from 15.3 percent in June as tax and VAT receipts. Federal budget expenditure increased by aggregate service prices jumped by 3 percent due to an 17 percent in nominal terms to 21.8 percent of GDP in increase in utility tariffs by 8.2 percent in one month. January–June from 19.0 percent of GDP over the same period Retreating food inflation−driven by seasonal declines in fruit a year ago, mainly due to a 1.5 percent of GDP year-on-year and vegetable prices−helped to partly compensate the impact increase in military spending and a 1.0 percent of GDP increase of the sharp increase in utility tariffs on headline inflation. in spending for social policy. The non-oil deficit stood at end- While the 12-month core inflation remained well above the June at 11.2 percent of GDP compared to 8.9 percent of GDP headline inflation, it decelerated slightly to 16.5 percent in July at end-June 2014. from 16.7 percent in June. For that reason and due to renewed In June banks reported a slight recovery in credits to firms, a depreciation pressures, the CBR remained cautious with continued improvement in the depositors’ base and further further key policy rates cuts in its monetary easing cycle and moderation in credit risk. Credit growth to firms increased to only cut them by 50 basis points to 11 percent, compared to a 20.7 percent, year-on-year, compared to 18.4 percent in May 100 basis points cut in June (and 150 basis points in April). while banks continued to downsize their credit portfolio to Rosstat’s preliminary poverty statistics for the first quarter of households (by 0.4 percent in June) which further slowed 2015 show a significant increase in the number of poor annual credit growth to households to 0.8 percent, compared people compared to quarter one of 2014. The total number of to 2.4 percent in May. Meanwhile banks’ depositors’ base poor people increased in the first quarter of 2015 to 22.9 continued improving in June with aggregate deposits growing million people (15.9 percent of the population) from 19.8 by 2.6 percent (in part due to the weaker ruble) and ruble million (13.8 percent of the population) in quarter one of 2014. deposits by 1.6 percent. Data also suggests a stabilization in The World Bank estimates that the seasonally adjusted credit risk in June: the share of non-performing loans (NPLs) by poverty level also increased in the first quarter of 2015 households stood at 7.5 percent (compared to 7.4 percent in compared to the last quarter of 2014, reaching 2010 levels. May) and the share of NPLs to non-financial organization stood at 5.9 percent (compared to 5.8 percent in May). On grounds In the first half of 2015 the federal budget registered a deficit of overly-risky credit activities, suspicious operations and low of 2.6 percent of GDP compared to a 1.9 percent surplus a capital adequacy the CBR revoked during June-July licenses year ago. Federal budget revenues decreased by seven from 27 (mostly Moscow-based banks), one of which (Rossiskii percent in nominal terms in the first six months of 2015 to 19.2 credit) was in the top 50 measured by its assets. percent of GDP from 21.1 percent of GDP in the first half of 2014 due to oil and gas revenues dropping to 8.6 percent of GDP from 11.0 percent of GDP in January-June 2014. Non-oil Figure 5: Inflation remains elevated … (percent, y-o-y) Figure 6: … … contributing to higher poverty levels 24 22 mln. people, sa poverty rate (percent), sa CPI food non-food services 20 19 core-CPI 18 14 16 9 14 4 12 -1 10 2010 2011 2012 2013 2014 2015 Source: Rosstat, Haver Analytics, WB team Source: Rosstat, Haver Analytics, World Bank team Источник: Росстат, Haver Analytics, команда Всемирного Please contact Birgit Hansl: bhansl@worldbank.org Prepared by a World Bank team under the guidance of Birgit Hansl, consisting of John Baffes, Olga Emelyanova, Mikhail Matytsin, Sergei Ulatov and Eka Vashakmadze. RUSSIAN FEDERATION Monthly Economic Developments – August 14, 2015