Russia’s GDP in January-June 2021 grew by 4.6% compared to the same period last year, according to the Ministry of Economic Development. In June, it reached the pre-pandemic level of 4Q2019, seasonally adjusted. That put annual growth in June at 8.5%, and in the second quarter, at 10.1%. The Ministry has improved its GDP growth assessment for 2021 to 3.8% instead of the earlier forecast of 2.9%. In 2020, during the crisis caused by the COVID-19 restrictions, it plunged 3.1%. Yet, the Russian economy contracted less than other major economies due to the smaller share of services in Russia’s GDP. The main factor in Russia’s economic recovery in January-June was the oil and gas prices regaining their pre-crisis levels. Russia continues to rank first/second in Europe and fifth/sixth in the world by GDP weighted by purchasing power parity. The main negative factor is the persisting growth of the tax burden on individuals and companies alike.
The Bank of Russia raised its benchmark policy rate to 6.5% in June, the most aggressive rate hike in recent years, bringing it level with the annual inflation. Inflation is the Russian government’s biggest headache. In fact, what we have is imported global inflation caused by the extremely soft monetary policies pursued by most central banks.
Russian Central Bank Governor Elvira Nabiullina believes inflation will persist in Russia, so the regulator is likely to continue its tight monetary policy. It is possible that the key interest rate will reach 7–7.25% by the end of this year, while inflation will not decrease to the target of 4% until the second half of 2022.
The stock market is doing well though. The Moscow Exchange index has added 18% since the beginning of this year, mainly due to value stories. Commodities companies have performed at their best. The recovery of production, and most importantly, the rise in oil prices have done their job.
Russians are increasingly joining online trading. There are more and more private brokerage accounts registered in Russia — 13 million at present, with about RUR 7 tln ($95.2 bln) concentrated in them. With the owners’ families, about 30–40 mio people are now playing on the Moscow Stock Exchange. The most popular blue chip is Gazprom. Russians have become a nation of financial speculators. In this context, consumer activity, or domestic demand, depends not only on real wages, but also on the Moscow Exchange index trends. And in any case, a revision of the privatization results is off the table now.
Is a reverse flow from the stock market to individual bank deposits possible? Let’s think logically. Russians have become extremely versed in managing their finances lately. The dividend yield on the Russian stock market is now 8%; the money won’t flow back to banks unless the income from interest on deposits is comparable with stock dividends. This means the key rate should reach 8.5–9%.
As for the ruble, with the current oil and gas prices, its exchange rate against the dollar should stand at 65–67. However, the fiscal rule is keeping the ruble from a sustainable appreciation. Daily purchases of foreign currency stand at RUR13.5 bln ($180 mio) in August, which is quite a lot for the low-liquid summertime market. The dollar is likely to remain in the RUR71–74 corridor in the foreseeable future. The Ministry of Finance and exporters do not seem to mind.
By Alexander Razuvayev, Head of Analytics at Alpari information and analytical center