Russia Monthly Economic Developments March 2021 The recovery in oil prices continues, with the price of Brent crude oil reaching close to US$70/bbl in March—an increase of more than 30 percent since the start of 2021. However, prices subsequently declined, with Brent dropping to US$60/bbl later in the month amid growing concerns about the continuing impact of the pandemic on oil demand. The number of new COVID-19 cases in Russia has declined compared to end-January but it remains higher than end-of summer levels. In February, the average exchange rate of the ruble with respect to the U.S. dollar slightly depreciated compared to the previous month (0.2 percent). While the ruble was supported by stronger oil prices, with the steepening of US treasury bonds yields, the EMDEs’ bond yields rose and capital inflows slowed. in January—February 2021, Russia’s current account surplus dropped by US$4.5 billion compared to the same period in 2020, standing at US$13.1 billion. According to the estimate of the Ministry of Economy, in February 2021, Russia’s GDP dropped by 2.8 percent, y/y, compared to a contraction of 2.2 percent in January. Weaker growth dynamics were largely due to leap year base effect. In February, industrial production shrank by 3.7 percent, y/y, which corresponded to an expansion of 1.3 percent, m/m, once adjusted for seasonal and calendar factors. In February, the annual headline consumer price index (CPI) inflation accelerated to 5.7 percent. Higher-than-expected inflation and a faster-than-expected economic rebound led to the Central Bank raising the key interest rate on March 19th by 25 bp to 4.50 percent– the first increase in policy rate since December 2018. The Central Bank noted that tightening conditions called for a return to neutral monetary policy, and that it remained open to further increases in the key rate in its upcoming meetings. Labor market dynamics continued to improve in February. The federal budget deficit widened to 645 billion rubles in January–February 2021, up from 165 billion rubles in the same period last year. Banks’ key credit risk and performance indicators remained largely stable, supported by the CBR’s policy response measures, including regulatory forbearance. In January, household lending continued to accelerate while corporate sector lending growth declined. The Global Context EMDE bond yields also rose, with capital inflows slowing in tandem. A year since COVID-19 was declared a pandemic by the World Health The recovery in oil prices continued in Organization, countries across the world March, with the price of Brent crude oil continue to grapple with stemming the reaching close to US$70/bbl in mid- spread of the virus. Following a downward March— an increase of more than 30 trend in daily new COVID-19 cases, rates percent since the start of 2021 (Figure 1). have risen since mid-February, in part reflecting an However, prices subsequently declined, with Brent uptick in Europe. Vaccine rollout is progressing, albeit, at dropping to $60/bbl later in the month amid growing an uneven pace, with nearly 5 doses administered per concerns about the continuing impact of the pandemic 100 people globally as of mid-March. Economic activity on oil demand. The strength in oil prices since the start also firmed in early 2021, with the global manufacturing of the year has been supported by the production PMI pointing to continued expansion as new export agreement among OPEC+, and the group surprised orders firm in tandem with the recovery in global goods markets at its meeting in March where it announced that trade volumes. Services activity, however, continues to members would continue their production at existing face formidable headwinds amid pandemic-related levels into April (including a continuation of the voluntary restrictions, including those on international travel, with additional cut of 1 million barrels per day (mb/d) by Saudi the global services PMI for new export orders signaling Arabia). Exceptions were made for Russia and continued contraction in February. While global Kazakhstan, which were granted increases of 130kb/d financing conditions remain relatively benign, U.S. and 20kb/d, respectively. The decision came as a surprise inflation expectations have continued to rise, triggering to financial markets, which had been expecting the group a sharp steepening of U.S. Treasury yields. In response, to increase production by around 0.5mb/d and Saudi 1 Arabia to cancel its voluntary cut. Oil prices rose by to be vaccinated in Russia), and more than 4.3 million around 5 percent on the day of the announcement. In Russian citizens to date have been vaccinated with the contrast, an attack on a key Saudi Arabian oil facility in two doses of the vaccine. The uptake of the vaccine in March had no lasting impact on prices. Despite the sharp Russia is slow compared to other countries based on increase in prices, the U.S. rig count remains well below total vaccinations per 100 persons: Russia (7.2), Israel pre-pandemic levels. (114.7), United Kingdom (49.6), USA (42.9), Turkey (17.3), EU (15.4), China (7.4)1. Figure 1: The recovery in oil prices continues Figure 2: The number of new COVID-19 cases in Russia has been declining since the end of December, but it remains higher than end-of summer levels Recent economic developments in Russia As of March 29, 2021, the total number of COVID-19 In February, the average exchange rate of the ruble with cases in Russia exceeded 4.5 million, the 4th highest respect to the U.S. dollar slightly depreciated compared count after the USA, India, and Brazil. The situation in to the previous month (0.2 percent, Figure 3). With the terms of the spread of the virus in the country is US treasury bonds yields steepening, the EMDEs’ bond gradually stabilizing (Figure 2). On March 29th, Russia yields rose as well, and capital inflows slowed. Higher oil registered 8,711 new cases. Since the beginning of the prices supported the ruble. On March 2nd, the EU and the pandemic, Russia has registered 98,033 deaths (293 U.S. imposed new sanctions on Russian officials. In deaths registered on March 24th). The total number of addition to the individuals, the 27th Scientific Center of tests conducted is greater than 119.7 million. Different the Ministry of Defense, the 33rd Central Scientific regions are lifting restrictions based on their respective Research Testing Institute of the Ministry of Defense, epidemiological situations. Russia has extended a ban on and the Russian State Scientific Research Institute of flights into and from the United Kingdom until the end of Organic Chemistry and Technology (GosNIIOKhT) also fell April 16th due to the UK coronavirus variant. This flight under the sanctions. The new sanctions had a limited ban has been in place since December 22, 2020. The effect on the ruble exchange rate: by mid-March the mass vaccination campaign that began in January ruble reached 72.96 per US$, the strongest value since continues. About 7 million Russian citizens have been the start of 2021. However, elevated geopolitical risks vaccinated with the first dose of the Sputnik V vaccine since then, a dip in oil prices, and the steep depreciation (about 20 percent of total number of people planned by of the Turkish lira weighed down on the ruble. the Ministry of Health to be vaccinated by mid-June and about 9 percent of the total number of people planned 1 https://ourworldindata.org/covid-vaccinations 2 Figure 3: In February, the average exchange rate of the Economic growth weakened in February in annual ruble with respect to the U.S. dollar slightly depreciated terms, due to a higher base of the last year on the back compared to the previous month of the leap year effect. According the estimate of the Ministry of Economy, in February 2021, Russia’s GDP dropped by 2.8 percent, y/y, compared to a contraction of 2.2 percent in January. While the number of working days did not decrease in February 2021, the leap year raised the base for enterprises operating under a continuous cycle (mineral resource extraction, energy products production). In February, mineral resource extraction dropped by 8.9 percent, y/y, with crude oil extraction output (capped by the OPEC+ agreement) decreasing by 14.2 percent, y/y. Manufacturing production fell by 2.4 percent, y/y, compared to a According to the Bank of Russia’s preliminary estimate, decrease of 0.2 percent in January.2 Coke production and in January—February 2021, the current account surplus metallurgy weighed down on manufacturing dynamics. dropped by US$4.5 billion compared to the same Meanwhile, positive annual growth continued in period in 2020, reaching US$13.1 billion. A weaker chemicals, textiles, motor vehicles, and furniture with trade balance on the back of a lower export value of production in these sectors exceeding pre-pandemic crude oil and oil products in January was the main reason levels. Overall, in February, industrial production output for the lower current account surplus. While the shrank by 3.7 percent y/y, which corresponded to an production cap for Russia was somewhat relaxed by the expansion of1.3 percent, m/m, adjusted for seasonal and OPEC+ agreement in January, oil production was still calendar factors (Figure 4). As in January, growth in lower than last year. Coupled with lower oil prices in construction remained flat (according to January data, January, this resulted in a loss of its crude oil export value positive growth in construction was registered only in 3 by about US$4.5 in January, y/y. The drop in the export out of 8 federal districts in Russia). In February, retail value of oil products was only due to the lower prices as trade turnover dropped by 1.3 percent, y/y, compared to export volume increased by 6.7 percent, y/y, in January -0.1 percent y/y in January. 2021. Somewhat stronger imports weakened the trade Figure 4: In February, industrial production output balance as well. According to January data, an increase in shrank by 3.7 percent y/y import value was driven by higher imports of machines and equipment, medication, and automobiles, which points to a continued rebound in domestic demand. In the first two months of 2021, net capital outflows amounted to US$12.0 billion, down from US$14.7 billion in the same period last year. International reserves increased by US$0.5 billion, mainly due to the purchases of foreign currency by the Bank of Russia under the fiscal rule framework. 2 Rosstat revised the January data upwards under its regular revision procedure. 3 In February, the annual headline consumer price index Figure 4: In February, the annual headline consumer (CPI) inflation accelerated to 5.7 percent (Figure 4). The price index (CPI) inflation accelerated to 5.7 percent annual inflation rate in Russian regions ranged from 2.5 to 9.7 percent, accelerating in most regions. The acceleration of food inflation continued to contribute most to the growth of headline CPI, increasing to 7.7 percent, y/y. The growth of food inflation resulted from the ruble’s depreciation, higher global food prices, and lower harvest for some agriculture items. Government measures, such as the introduction of price caps, export quotas, subsidies to producers, and incentives for development programs for food production, limited the rise in prices for certain goods. An increase in export duties on cereals since February helped lower wheat prices. While price caps and export quotas are politically Labor market dynamics continued to improve in attractive, they are also distortive. A better approach February (Figure 5). The unemployment rate showed would be to use targeted social assistance to deliver improvement, decreasing to 5.7 percent (sa), down from relief to the most vulnerable segments of the population. 6.0 percent (sa) a month before. The number of Non-food consumer goods inflation accelerated to 5.7 unemployed people fell from 4.3 million to 4.2 million. percent, y/y, in February, up from 5.1 percent, y/y, in Real wages grew by 0.1 percent, y/y, after a jump in January. Prices of construction materials, tobacco, and December (+4.6 percent, y/y), possibly reflecting petroleum accelerated the most compared to January. advance payments in anticipation of an increase of the Inflation in services slightly increased to 2.9 percent, y/y, tax rate on personal incomes exceeding 5 million rubles (compared to 2.8 percent in the previous month), per year. reflecting an easing of COVID-19 restrictions and higher Figure 5: Labor market dynamics continued to improve demand for outward tourist services. In February, the in February core CPI inflation stood at 5 percent, y/y. Household inflation expectations remained elevated, though they decreased to 9.9 percent in February from 10.5 percent in January. Higher-than-expected inflation and a faster-than- expected economic rebound led to the Central Bank raising the key interest rate on March 19th by 25 bp to 4.50 percent. The Central Bank noted that the fast recovery of demand and elevated inflationary pressure called for a return to neutral monetary policy, and that it remained open to further increases in the key rate in its upcoming meetings. The federal budget deficit widened to 645 billion rubles in January – February 2021, up from 165 billion rubles in the same period last year. The higher deficit stems largely from higher expenditures coupled with lower energy revenues. Energy revenues dropped on the back of both lower energy prices and lower crude oil 4 production volumes. Non-energy revenues grew by subject to employment of non-working citizens who about 8 percent, driven mainly by higher VAT receipts were registered at employment centers before January (both for domestically produced and imported goods, 1, 2021. The federal budget has already allocated more possibly reflecting the ongoing economic rebound). than 12 billion rubles for these purposes. It is expected Primary expenditures grew by 11.2 percent, with that this measure will allow employing at least 200 expenditures on social policy, national defense, and thousand people. (v) In addition, the government housing and communal services driving the growth. approved the rules for the provision of grants to non- Deficit financing was done mainly by reducing the profit organizations for the implementation of the balances of the last year (-311 billion rubles) and through retraining program and additional professional domestic bond issuances (net increase of 108 billion education with the possibility of further employment. rubles). The federal budget for these purposes provides more than 10 billion rubles in 2021 and 7.4 billion rubles each The government continues to provide support to in 2022 and 2023. Not only citizens who have lost their citizens and businesses amidst the pandemic. Recently jobs due to the pandemic, but also people over 50, as introduced measures include: (i) A new program to well as women with small children, will be eligible to support companies from impacted industries such as participate in the program. hotels and restaurants, culture, tourism, sports, and Banks’ key credit risk and performance indicators entertainment, with preferential loans at 3 percent remained largely stable, supported by the CBR policy subject to them retaining at least 90 percent of jobs response measures, including regulatory forbearance during the term of the loan agreement. Both small and (Figure 6). The forbearance on loan provisioning granted large companies will be eligible to take part in the new by the CBR at the outset of the pandemic allows banks to program, and around Rub7.7 billion will be allocated for delay reclassifying restructured loans and postpone this purpose from the reserve fund of the Government. provisioning for potential loan losses until April 1, 2021 A further package of additional support is being for corporate loans and July 1, 2021 for retail loans and discussed within the government; (ii) Since March, the loans to SMEs. As of December 1, 2020, the aggregate government resumed the tourist cashback program, capital adequacy ratio stood at 12.4 percent (against a which involves a partial compensation (20 percent of the regulatory minimum of 8 percent). Non-performing total amount but not more than 20,000 rubles) of funds loans remained largely unchanged at 9 percent of all spent on the purchase of tours in Russia. Mandatory loans as banks benefited from the regulatory conditions for participation in the program include the forbearance measures. The banking sector’s profitability duration of the tour being at least two nights and has been showing signs of recovery, supported by strong payment made through the Russian payment system credit growth fueled by the government’s credit support "Mir". The government’s decision is aimed at supporting programs and improving economic conditions. In January citizens and developing domestic tourism. Two billion 2021, the banking sector’s net profit amounted to 205 rubles have been allocated from the government's billion rubles (US$2.8 billion) - which was comparable to reserve fund; (iii) Another 2.7 billion rubles were the profit seen in the same period of 2020 (197 billion allocated from the reserve fund to the regions to provide rubles (US$3.2 billion). As of December 1, 2020, the free medicines to patients with the coronavirus infection return on assets (ROA) and return on equity (ROE) were who are being treated at home under the supervision of 1.7 percent and 15.8 percent, respectively, compared to doctors. Earlier, more than 10.7 billion rubles were 2.1 percent and 19.1 percent at the beginning of the allocated for these purposes. (iv) Companies and year. individual entrepreneurs will be able to receive subsidies from the state in the amount of three minimum wages (1 In January, household lending continued to accelerate minimum wage – 12,792 rubles) for each new employee while corporate sector lending growth declined. Credit 5 to households in rubles grew by 0.8 percent 3 , m/m, by the pandemic. Recently, the CBR noted that it (compared to 0.7 percent, m/m, in December 2020) and expected only 20-30 percent of bank loans restructured 13.5 percent, y/y. Credit to the corporate sector in rubles as a result of the pandemic to become problematic, fell by 0.2 percent, m/m, compared to 0.6 percent, m/m, requiring incremental credit loss charges of around 2 growth in December 2020. In annual terms, corporate percent of banks’ loan books this year. lending grew at 10.7 percent, y/y, (after adjusting for FX Figure 6: As of December 1, key credit risk and banking changes). performance indicators remained stable In February, on the back of the economic recovery, the demand from both households and companies for the restructuring of their loans continued to decline compared to the end of 2020. Eleven percent of banks' loans had been restructured since the beginning of the pandemic according to the CBR, including 14 percent of total loans to large corporates, 15 percent of loans to SMEs, and 4 percent of loans to individuals. Nearly half of the restructured SME loans accounted for wholesale and retail trade enterprises, 17 percent for transportation and storage, and 10 percent for hotels and catering – sectors that have been affected the most In its analytical work, the World Bank uses official statistics of the Russian Federation. By relying on these data, the World Bank does not intend to make any judgment on the legal or other status of the territories concerned or to prejudice the final determination of the parties' claims. 3 Source: CBR. 6