Russia Monthly Economic Developments July 2021 Oil prices saw sharp moves in June and July as a result of both demand and production factors. The price of Brent crude oil averaged at US$73/bbl in June, marking a seven percent increase from May and its highest level since October 2018, before easing in July following an OPEC+ production agreement. Global activity, while still solid, appears to have moderated somewhat in 2021Q2, with the global composite PMI slowing about 2 index points to 56.6 in June. In that month, the average exchange rate of the ruble with respect to the U.S. dollar continued to strengthen supported by higher oil prices and lower risk perception. Yet in July, when financial volatility reemerged in global markets as mounting new COVID-19 cases triggered concern over the durability of global recovery, the ruble lost 1.8 percent, compared to June. Industrial production growth momentum slowed in June (-0.4 percent, m/m, sa), due mainly to weaker growth momentum in manufacturing. The OPEC+ agreement suggests higher crude oil production in Russia in August - November 2021. In January – June 2021, the current account registered a surplus of US$43.1 billion, US$18 billion higher than in the same period of last year supported by a stronger trade balance and still-subdued travel abroad. Both demand- and supply-side inflationary factors pushed up annual consumer price index (CPI) inflation to 6.6 percent in June - the maximum since August 2016. Elevated inflationary pressures, coupled with a rebound in domestic demand, prompted the Central Bank of Russia (CBR) to raise its key interest rate by 100 bp to 6.5 percent on July 23rd. Labor market dynamics are steadily improving. Banks’ key credit risk and performance indicators have remained largely stable supported by the CBR’s policy response measures, including regulatory forbearance. In June, household sector lending growth slightly accelerated, driven mainly by accelerated growth of mortgage loans. The Global Context contribute to tighter financing conditions among EMDEs in July, with EMBI spreads Global activity, while still solid, appears to widening and portfolio outflows resuming have moderated somewhat in 2021Q2, for several EMDEs. with global composite PMI slowing about 2 index points to 56.6 in June. Expansion in Oil prices saw sharp moves in June and July manufacturing PMI also edged down in as a result of both demand and production June, partly reflecting renewed softness in factors (Figure 1). The price of Brent crude certain large emerging markets and developing oil averaged at US$73/bbl in June, marking a seven economies (EMDEs) in the wake of deteriorating COVID- percent increase from May and its highest level since 19 trends. Global daily new COVID-19 cases have trended October 2018. The recovery in prices was driven partly up alongside the spread of the Delta variant in July. The by improving demand, with the International Energy number of new COVID-19 deaths, however, has diverged Agency estimating that demand rose by 3.2 million amid highly uneven vaccination progress. Countries with barrels per day (mb/d) in June to 96.8 mb/d; it expects relatively high vaccination rates have experienced falling demand to continue recovering through the rest of the mortality rates, while those with lower vaccination— year. Oil prices rose further in July, hitting a peak of including several EMDEs—have grappled with an uptick. US$78/bbl in the first week of the month after a Meanwhile, financial market volatility has reemerged in disagreement between certain OPEC+ members on July as mounting new COVID-19 cases triggered concern future production quotas. A new agreement was reached over the durability of global recovery. Equity prices on July 19, which resulted in oil prices declining by retreated from historically high levels in mid-July but around 7 percent on the day to under US$70/bbl, have since recouped most of those losses. Similarly, 10- although they have since partially recovered. Under the year U.S. Treasury yields slipped below 1.2 percent—the new production agreement, five countries—Iraq, Kuwait, lowest since early February—with rates only partly Russia, Saudi Arabia, and the UAE—had their baseline recovering in late July. In contrast, lingering uncertainty production levels revised upwards. Russia and Saudi over the timing of economic recovery has continued to Arabia received the largest increases of 500 thousand 1 barrels per day (kb/d). The group also agreed to raise As of end -July Russia ranked 43rd (out of 192 countries) production by 400kb/d every month starting in August in terms of number of new cases weighted by population and continuing until the original cuts of 9.7mb/d (156.6 new cases/million of population, 7-day rolling effective since May 1, 2020 have been restored, likely average) (Figure 3). This is about twice as high as the toward the end of 2022. World average. Figure 1: Oil prices saw sharp moves in June and July as Figure 3: By end-July, the number of new cases in Russia a result of both demand and production factors weighted by population is about two times higher than the World average. Source: IEA. Recent economic developments in Russia Source: Our World in Data. By the end of July, the number of new COVID-19 cases The number of regions requiring mandatory vaccination in Russia was slightly below its peak in the middle of the for certain groups of population doubled in July (from 18 month (Figure 2). As of July 30, 2021, the total number regions at the end of June to 35 on July 23rd). In these of COVID-19 cases in Russia totaled 6.2 million, the regions, vaccination is compulsory for certain groups of 3rd highest after the USA (35.0 million) and India (31.6 the population (those working in the spheres of trade, million). On July 30th, Russia registered 23,363 1 new health care, education, social protection and social cases – slightly below the peak number of mid- July. Since services, catering, transport, housing and communal the beginning of the pandemic, Russia has registered services, culture, leisure, sports, client departments of 157,771 deaths (782 deaths on July 30th2). financial organizations, multifunctional centers, and organizations providing postal services for state and Figure 2: The number of new COVID-19 cases in Russia municipal employees). The authorities aim to ensure has been slowly decreasing since mid-July (largely due 80% immunity among staff (share of the vaccinated plus to a lower number of new cases in Moscow) employees recovered from Covid-19 over the past six months), allowing paid leave for vaccinated employees and suspension without pay for those who refuse vaccination. On July 1, the Mayor of Moscow announced the booster campaign, which allows vaccinated residents to get a third shot after six months, as the city contends with the highly contagious Delta variant. 1 2 7-day average. 7-day average. 2 Enhanced efforts towards vaccination have helped raise vaccination rates: the share of people fully or partly Figure 4: Russia’s stringency index somewhat vaccinated reached 24.4 percent on July 28th (compared subsided in July to 11.5 percent on June 1). While catching up, vaccination rates in Russia remain relatively low compared to other countries: worldwide (27.8 percent), USA (56.7 percent), France (59.1 percent), Germany (60.9 percent), Italy (62.6 percent), Canada (71.2 percent). In June, the worsening epidemiological situation has forced the authorities of most Russian regions to introduce additional restrictive measures or strengthen the existing measures to prevent the spread of infection. Many of these measures remain in place. Restrictive Source: Our World in Data. measures vary depending on the region, but most In July, when financial volatility reemerged in global common measures include restrictions on operating of markets as mounting new COVID-19 cases triggered cafes and restaurants (ban on night working hours, ban concern over the durability of the global recovery, the on food courts operation in malls, etc.), restrictions on ruble lost 1.8 percent, compared to the levels of June public events, mandatory remote working regimes (for (Figure 5). The ruble slightly underperformed other vulnerable population groups or certain percent of Emerging Market currencies with MSCI Emerging employees), restrictions on theaters and movie theaters Markets currency index losing 1.1 percent in July capacity, restrictions on hotels operation (mandatory compared to June. negative PCR test or vaccination certificates for arriving guests). In mid-July, the substantial increase in new cases Figure 5: In July, the ruble exchange rate depreciated by made the authorities of Tuva Republic introduce about 1.8 percent with respect to the US dollar. complete lockdown. At the same time some regions eased restriction measures as the situation started improving: 2-weeks lockdown ended in Buryatia republic. In addition, Moscow canceled QR codes mandatory for café and restaurants customers and opened food courts in malls and removed the ban on night working hours for cafes and restaurants. Overall, after peaking at the end of June, Russia’s stringency index3 somewhat subsided in July (Figure 4). Source: Haver Analytics, Investing.com. In January – June 2021, the current account registered a surplus of US$43.1 billion, US$18 billion above the same period of last year. In the first six months of 2021, 3 This is a composite measure based on nine response If policies vary at the subnational level, the index is shown as indicators including school closures, workplace closures, and the response level of the strictest sub-region. travel bans, rescaled to a value from 0 to 100 (100 = strictest). https://ourworldindata.org/coronavirus/country/russia 3 higher prices for oil, gas, and metals supported the trade Figure 7: Imports of equipment demonstrated robust balance, which strengthened by US$12 billion to US$62.4 growth (percent change, January – May 2021, y/y) billion. According to available information for January – May 2021, the export volume of pipeline gas increased by 15.3 percent, y/y, while the crude oil export volume dropped by 16.9 percent, y/y (Figure 6). Imports of certain items demonstrated robust growth in January – May 2021 reflecting a rebound in domestic demand (Figure 7). Net private capital outflows dropped to US$28.2 billion, compared to US$31.2 billion in the previous year. Transactions of the non-banking sector related both to the reduction of net liabilities to non- residents and to increased net investments in financial Source: Customs Service of Russia. assets abroad were drivers of net capital outflows. In the first six months of 2021, international reserves grew by Industrial production growth momentum slowed in US$12.0 billion4, largely due to resumed FX purchases in June (Figure 8). Industrial production output declined the fiscal rule framework. slightly (-0.4percent, m/m, sa) on the back of weaker growth momentum in manufacturing. In annual terms Figure 6: Global economic recovery pushed up manufacturing grew by 7.7 percent, y/y, from a low base demand for major export items (percentage change, last year and by 4.3 percent compared to June 2019 5. January – May 2021, y/y) Output in mineral resource extraction, still constrained by the OPEC+ agreement, was below levels in June 2019 by 1.2 percent. Recent agreement in the framework of OPEC+ suggests crude oil production growth in August - November by 0.1 million b/d each month to reach 9.9 million b/d in November. According to the Vice Prime Minister, Russia will reach its pre-crisis crude production level in May 2022. In July, for the first time, Rosstat published its estimates of value added produced in oil and gas sector (upstream and downstream companies) in Russia’s GDP. With energy prices going down in 2020, it dropped to 15.2 percent from 19.2 percent in 2019 (current prices). Source: Customs Service of Russia. 4 Growth due to BOP operations. In the first six months US$595.8 at the end of 2020, largely as a result of asset price international reserves dropped to US$591.7 billion from movements. 5 Source: Ministry of Economic Development. 4 Figure 8: Industrial production growth momentum Figure 9: In June, annual headline consumer price index slowed in June (percent, y/y) (CPI) inflation rose to 6.6 percent Source: Rosstat. Source: Haver Analytics. Several demand and supply factors contributed to Labor market dynamics are steadily improving (Figure increasing inflation in June (Figure 9). Among them are 10). In May, the unemployment rate showed recovering domestic demand, increased costs for improvement, decreasing to 4.9 percent (sa), vs. 6.1 producers of goods and service providers caused by percent (sa) in May 2020 and down from 5.1 percent (sa) global and local supply chain problems, as well as a month before. The number of unemployed people fell requirements for sanitary and epidemic protection, and from 3.9 million to 3.7 million. Real wages grew by 7.8 continuing restrictive measures. The annual consumer percent, y/y, in April (compared to 1.8 percent, y/y, in price index (CPI) inflation rose to 6.6 percent in June - the March). Overall, cumulative growth for the first four highest reading since August 2016. Annual CPI inflation months of 2021 was 2.9 percent, y/y. accelerated in most Russian regions and ranged from 3.6 to 9.9 percent. The acceleration of food inflation Figure 10: Labor market dynamics continued to improve continued to contribute the most to the growth of in May headline inflation (7.9 percent, y/y, compared to 7.4 percent, y/y, in May). Non-food consumer goods inflation rose to 7 percent, y/y, in June, up from 6.7 percent, y/y, in May. Inflation in services accelerated to 4 percent, y/y, compared to 3.3 percent, y/y, in the previous month, reflecting high demand for tourism services, both domestic and external. In June, core CPI stood at 6.6 percent, y/y. Household inflation expectations remained elevated, increasing to 11.9 percent in June, up from 11.3 percent in May. Elevated inflationary pressures, coupled with a rebound in domestic demand, prompted the Central Bank of Russia Source: Rosstat, Haver Analytics. (CBR) to raise its key interest rate by 100 bp to 6.5 In the first half of 2021, the federal budget's fiscal percent on July 23rd. position improved amidst an economic rebound, higher oil prices, and elevated inflation. The fiscal position improved as primary expenditures (+Rub 568 billion or 5 +0.1 percent, y/y, in real terms) increased less than stood at 12.6 percent (against a regulatory minimum of budget revenues (+Rub 2173 billion or +17.3 percent, 8 percent). Compared to May 2021, non-performing y/y, in real terms). In the first six months of 2021, federal loans remained largely unchanged at 8.6 percent of all budget revenues increased as both energy (+Rub 1115 loans as banks benefited from regulatory forbearance billion, y/y) and non-energy revenues (+Rub 1058 billion, measures. The banking sector’s profitability has been y/y)6 grew. Oil and gas revenue receipts increased on the showing signs of recovery, supported by strong credit back of higher oil/gas prices, higher volumes of natural growth fueled in turn by the government’s credit support gas exports attributed to a cold winter, and a weaker programs and improving economic conditions less ruble. Higher non-energy revenues were mostly due to demanding for reserves. From January – June 2021, the higher VAT receipts, excise taxes, and import customs banking sector’s net profit amounted to Rub 1.2 trillion duties reflecting on Russia’s economic recovery. Elevated rubles (US$16.4 billion), which is almost double the same inflation supported non-oil/gas federal budget revenues period of 2020 (Rub 630 billion or US$9.1 billion) despite as well. In January – June 2021, federal budget spending the ending of regulatory forbearance measures, when on the national economy grew the most (including restructured corporate loans had to be fully provisioned, spending related to the program supporting wage on April 1, 2021. As of June 1, 2020, the return on assets payments of enterprises in 20207), state management, (ROA) and return on equity (ROE) was 2 percent and 19.2 national defense, environment, communal and housing percent, respectively, compared to 1.7 percent and 15.7 services, and education. Federal budget spending percent, respectively, at the beginning of the year. dropped for social policy, health, and interbudgetary In June, household lending growth slightly accelerated, transfers. The federal budget surplus increased to Rub driven mainly by higher growth of mortgage loans. 626 billion, compared to a Rub 823 billion deficit in the Credit to the corporate sector remained strong. In June, same period of last year. Compared to January – June household lending grew by 2.5 percent, m/m (compared 2020, the federal budget non-oil/gas primary deficit to average 2.2 percent m/m in March - May). Household improved by Rub 490 billion to Rub 2,644 billion8. lending growth continued to benefit from the subsidized In June, the federal budget debt denominated in rubles mortgage loan program. Unsecured lending growth was increased by Rub 206.5 billion (+ Rub 203.8 billion in also strong, revealing its importance in the economic securities and +Rub 2.7 billion in state guarantees). As of recovery. Overall, in June, credit to households in rubles July 1, 2021, federal budget debt denominated in rubles grew by 24 percent, y/y, compared to 22 percent, y/y, in totaled Rub15.5trillion (+10 percent since end-2020). In the prior month. Household funding side dynamics June, the federal government placed bonds for Rub remains weak. The total retail funding side reported 194.9 billion compared to Rub 530.3 billion in May 2021. growth of 2.9% y/y (+0.4 m/m). The trend for increasing In June, the share of non-residents in government bonds share of current accounts persisted with retail deposits slightly rose to 19.7 percent from 19.5 percent in May. showing limited response to the policy rate increase so far. In June, credit to the corporate sector (in rubles) Banks’ key credit risk and performance indicators increased by 15.4 percent, y/y, versus 15.3 percent, y/y, remained largely stable supported by CBR policy in May, backed by government programs for affected response measures, including regulatory forbearance industries and systemically important enterprises. In the (Figure 11). As of July 1, 2021, the capital adequacy ratio second quarter of 2021, the demand from households 6 With the adjustment for revenues for the Sberbank deal, at the level of end-April 2020 were converted to grants. This federal budget non-oil/gas revenues increased by R1924 program totaled Rub 0.4 trillion. 8 billion (+28.4 percent, y/y, real terms). With the adjustment for revenues for the Sberbank deal, 7 Enterprises applied for loans supporting payment of wages federal budget non-oil/gas primary deficit improved by Rub in the amount of minimum wages. The loans of those 1299 billion. enterprises that managed to sustain their employee numbers 6 for the restructuring of their loans continued to decline Figure 11: As of June 1st, key credit risk and banking compared to the beginning of the year. On the back of performance indicators had remained stable the growing spread of coronavirus infection and the imposed restrictive measures, the CBR recommended that credit institutions continue to restructure loans and borrowings for citizens and SMEs until October 1, 2021. Source: Bank of Russia. 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. 7