Russia Political & Economic Risk Analysis

Modest growth amid solid economic fundamentals


SENSITIVE RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD1,658bn (World ranking 11, World Bank 2018)
Population 144mn (World ranking 9, World Bank 2018)
Form of state Federation
Head of state Vladimir Vladimirovich PUTIN (President)
Next elections 2021, legislative
  • Abundant natural resources, in particular oil and gas
  • 21 years of continued current account surpluses (including the crisis years 2009 and 2015-2016)
  • Low public debt
  • Comfortable foreign exchange reserves
  • Far-reaching structural reforms still outstanding
  • High vulnerability to global oil price shocks
  • Prone to capital flight
  • Exchange rate remains vulnerable to volatility and sudden depreciation
  • Prolonged recession has adversely affected corporate profitability
  • Poor rule of law and high level of perceived corruption
  • Geopolitical risks: Conflict with Ukraine and serious dispute with the West over that conflict (including sanctions and counter-sanctions). Also involved in Syria crisis

Can Russia fuel growth?

Annual real GDP growth in Russia markedly decelerated to +1.3% in 2019, after it had risen to a six-year high of +2.3% in 2018. The economic performance was particularly weak in H1 (+0.7% y/y) as the VAT hike by +2pp at the start of 2019 curtailed the expansion of administrative & support services, retail sales and wholesale sales (the latter especially as large traders had increased stocks ahead of the VAT hike). Growth recovered to an estimated +1.8% y/y in H2. Details for Q4 and full-year 2019 are not available as yet, but monthly indicators suggest that strengthening domestic demand led the pick-up in growth in H2. In particular, consumer spending benefited from rapidly falling inflation and retail sales increased by +2% y/y in Q4. Meanwhile, balance of payments data indicate that external trade activity (both exports and imports) weakened markedly in 2019.

Going forward, the Russian economy is expected to maintain the momentum that it reached at the end of 2019, with looser monetary policy and some fiscal stimulus supporting growth in the next two years. However, a number of downside risks could dampen the outlook, including delays in planned government investment projects, oil price volatility, ongoing global trade tensions and the introduction of further sanctions against Russia. Overall, we forecast annual growth of +1.9% in 2020 and +1.8% in 2021.

In the medium to longer term, ongoing Western sanctions and, perhaps more importantly, persistent structural rigidities are likely to continue to curtail Russian growth prospects. These include the high dependence of the economy on commodities, notably the extraction of hydrocarbons, but also the large footprint of the state in the economy, as well as a still weak business environment. The hydrocarbons sector accounted for approximately 60% of merchandise exports and 30% of government revenues in 2018, much higher shares than in the year 2000. And the IMF has recently estimated that the Russian state has a share of 33% in GDP and 38% in formal value added. One reason is that state-owned enterprises continue to have a predominant role in the economy.

Regarding the business environment, the World Bank’s Worldwide Governance Indicators 2019 survey suggests that regulatory quality (rank 143 out of 206 economies), rule of law (rank 166) and percep­tions of corruption (rank 165) remain areas of serious concern in Russia. Moreover, there has been hardly any improvement in these areas over the past decade and Russia is now trailing peer countries. With regard to environmental sustainability, Russia also does not score well. The main issues are very low levels of renewable electricity output and recycling. The country fares somewhat better regarding energy intensity and CO2 emissions, while it does well with regard to water stress and vulnerability to climate change. Overall, Russia ranks 85th out of 210 economies in our proprietary environmental sustainability scoring.

Growth-enhancing policies represent only a moderate departure from an overall prudent policy mix

Cautious and well-tuned economic policies have provided some cushion against new sanctions since 2018 and should continue to do so in the near term. These include monetary policy credibility, diligent fiscal policy and export diversification. Furthermore, the Russian government is supposedly pursuing the de-dollarization of the economy. A reduced dependence on the USD would lower the vulnerability to external shocks; however, implementation is not easy and will take time.

Monetary policy set to ease but remain well-tuned and credible

In the aftermath of the currency crisis and the resulting surge in inflation in 2014-2015, the Central Bank of Russia (CBR) embarked on a credible inflation targeting regime under Governor Elvira Nabiullina. Monetary policy was gradually eased in line with falling inflation until mid-2018. When inflation expectations began to rise again due to the anticipated VAT hike in 2019, policy interest rates were pre-emptively hiked from September 2018. Then, in June 2019, the CBR changed course again and cut its key policy interest rate by a cumulative 150bp to 6.25% in December 2019, citing slowing inflation and the weak economic momentum in most of 2019. Crucially, the policy rate remained well above the inflation rate (3.0% y/y in December 2019). Governor Nabiullina has also shut down many non-viable banks, though more needs to be done on this end. Overall, the CBR currently enjoys a high degree of independence and credibility, especially as compared to peer countries.

Nonetheless, currency risk remains on the agenda, although an equally steep RUB depreciation as in 2015 (-59% vs. the USD on average) is highly unlikely until end-2020. But after rebounding by +13% in 2017, the RUB experienced volatility again and lost on average -8% in 2018 and -3% in 2019, mainly responding to sharp oil price moves or disturbing political events, including new sanctions.

In January 2020, headline inflation dropped to a 19-month low of 2.4% y/y, mainly reflecting the unwinding of the +2pp VAT hike a year earlier. As a consequence, the CBR lowered its policy rate further by 25bp to 6.00% in early February 2020. We expect consumer price inflation to remain low in the first half of 2020 before edging up moderately in the second half, resulting in an average 3.1% or so in the year as a whole. We also expect a further 50bp of rate cuts to 5.50% by the middle of 2020. These forecasts also include the assumption that the RUB will depreciate only moderately by around -3% vs. the USD.

Fiscal prudence to be relaxed but not abandoned

Fiscal policy has been diligent in recent years. In the wake of the currency crisis and recession in 2015-2016, Russian authorities have prioritized financial stability over economic growth. Public spending growth has remained modest (+2.5% peak in 2017, +0.9% in 2018) so that government expenditure in Russia is still fairly moderate as compared to other countries, accounting for around 35% of GDP. This is, for example, similar to the ratio in China but lower than in South Africa (39%), Poland (41%), Hungary (47%) or the EU average (46%). At the start of 2019, the government increased the VAT rate from 18% to 20%, a step in the right direction in order to diversify its fiscal income base and reduce its vulnerability to global commodity prices. And Russia issued more debt than needed in 2019, apparently in a pre-emptive stockpiling as the threat of further U.S. sanctions was looming (and materialized to some extent).

However, the Russian government had also announced a set of so-called National Projects, an investment program estimated at RUB25tn (about USD400bn) running from 2019-2024. The aim was to boost growth and living standards, which have suffered markedly since the 2015-2016 crisis. But this program did not really take off in 2019. The formation of a new government in early 2020 was likely intended to speed up public investment. It remains to be seen how well this will work overall, but we expect at least some fiscal stimulus with positive growth effects to come, especially as there will be legislative elections in 2021.

Russia’s fiscal balance shifted back to a surplus of +2.6% of GDP in 2018, which narrowed to an estimated +1.8% of GDP in 2019 amid slower growth. As a result of the expected fiscal stimulus measures, we forecast annual surpluses to decline to around +1% of GDP in 2020-2021.

Overall public debt is still low in Russia, estimated at 15% of GDP currently, and should remain in check in the next few years.

External liquidity position solid, by and large

Despite the oil price slump in 2014-2016, Russia’s current account remained in surplus, though it narrowed to +1.9% of GDP in 2016. As oil prices recovered, the surplus widened to +6.8% of GDP in 2018. Thereafter, it declined to an estimated +4.2% of GDP in 2019, mainly because merchandise exports dropped by -6%, which compares to a strong +25% increase in the previous year. The main triggers for the contraction in 2019 were lower global oil prices (benchmark Brent at 64 USD/bbl on average vs. 72 USD/bbl in 2018) and the oil output cuts agreed with OPEC and some other major oil producers (called OPEC+), which sent  oil and gas exports down by -9%. Moreover, the impact of new U.S. sanctions imposed on Russia in the course of 2019, combined with slower global trade growth, also contributed to the weaker performance in 2019 as non-oil and gas exports decreased by -1% (vs. +14% in 2018). Meanwhile, merchandise imports expanded by just +2% or +USD6bn to USD255bn in 2019.

In 2020, we forecast the current account surplus to increase slightly to about +4.5% of GDP, mainly for two reasons: (i) Russia’s exports should benefit from strengthening global trade growth in 2020, notably in USD terms (+2.6% vs. -1.9% in 2019). (ii) Oil output cuts agreed with OPEC+ will possibly be relaxed gradually in H2 2020. Beyond 2020, we expect solid, albeit somewhat smaller external surpluses to be maintained.

Meanwhile, the impact of foreign sanctions on financial flows to and from Russia appears to have moderated. Private-sector net capital outflows from Russia declined to just -USD27bn in 2019, down from -USD63bn in 2018 and well below the record highs in 2014 and 2008. The annual average over the last 10 years was -USD58bn. In 2020, we expect a similar amount of net capital outflows (as in 2019) of around -USD30bn for the Russian private sector.

Official foreign exchange (FX) reserves have continued to recover and reached USD444bn in December 2019, up from the temporary low of USD308bn in April 2015 and USD382 at end-2018. Current FX reserves are comfortable in terms of import cover (over 14 months). In other terms, reserves cover more than 300% of the estimated external debt payments falling due in the next 12 months (>125% is assessed as comfortable).

Gross external debt rose to USD481bn at the end of 2019, up from USD455 a year earlier. The rise in 2019 is almost entirely reflecting new, mostly RUB-denominated debt by the Russian government, the afore-mentioned pre-emptive stockpiling as the threat of further sanctions is looming. The current level of external debt is still moderate in relation to GDP (less than 30%) and export earnings (around 100%). The debt-service ratio is forecast at a manageable level of just below 20% in both 2020 and 2021.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
China 9%
22% China
Germany 8%
12% Germany
Turkey 5%
5% Belarus
Belarus 4%
4% Italy
United States 4%
4% France

Trade structure by product

(% of total)

Exports Rank Imports
Petroleum, petroleum products and related materials 48%
10% Road vehicles
Iron and steel 7%
7% Other industrial machinery and parts
Non-ferrous metals 5%
6% Articles of apparel & clothing accessories
Coal, coke and briquettes 4%
6% Electrical machinery, apparatus and appliances, n.e.s.
Fertilizers other than group 272 3%
5% Medicinal and pharmaceutical products

The payment behavior of domestic firms is often poor and the businesses themselves have complex legal structures. Payment terms are not fully regulated and Russian counterparties try to renegotiate conditions, requesting postponement of payments or ignoring contractual obligations.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Courts can be fairly efficient when a debt is certain and undisputed, but legal proceedings may otherwise be complex (no default judgments, no fast track proceedings above EUR 4,000 even if the debt is certain and undisputed) and cannot be avoided through Alternative Dispute Resolution methods(which is not relied upon) or through foreign courts (since Russian courts apply extremely strict jurisdictional exclusivity rules).

Insolvency proceedings ought to be avoided. A debt renegotiation mechanism isindeed available, although it is unused in practice. Liquidation is therefore the default procedure, but unsecured creditors would have very limited chances of recovering their debt.


Euler Hermes

Economic Research Team

Manfred Stamer

Senior Economist for Emerging Europe and the Middle East     

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