East Office Quarterly report for 3Q21: From crisis economy to shortage economy

Please find attached the latest East Office Quarterly report for 3Q21 and updated East Office scenarios up to 2030. In addition to the latest macroeconomic developments for the last quarter, the report analyses what is behind high inflation in Russia and how long could it last.

Key takeaways

Recent events in 3Q21 for the Russian economy

 Russian economic growth slowing down in 3Q21 as the low base level fades. In 3Q21, real GDP is estimated to have reached around 4.3 % (y/y) compared to 10.5 % (y/y) in 2Q21

 Rouble appreciating in 3Q21 driven by high commodity prices, geopolitical tensions rising. Rouble has appreciated by 9 % since the beginning of the year but less than the high energy prices would imply. The Central Bank’s tightening of monetary policy was also supportive for a stronger RUB. Geopolitical tensions between Ukraine and Russia and on the Polish-Belarus border could cap the RUB’s appreciation in the coming months.

 Inflation driven by global shortages and increasingly by domestic supply shortages in food. Consumer price inflation has accelerated to 8.1 % in October and the main driver was accelerated by food price inflation (10.9 %) driven by a weak harvest and a severe epizootic situation in cattle.

 Unemployment rate back to record low levels, real incomes constrained by high inflation. Growth in real wages has decelerated due to rampant inflation levels and posited growth of only 1.5 % (y/y) in August. Growth of real disposable incomes has accelerated to 8.1 % (y/y).

 Credit booming despite a higher interest rate level. Credit continues to expand fast in Russia (+14% y/y in 3Q21). Especially, mortgages have been growing in popularity (+27 % y/y in Jan-Sep 2021) despite a more limited state mortgage support program since July.

 Russian current account surplus at a historical high as commodity prices boom. Russia’s quarterly export revenues have reached their highest level since 4Q13. Also, the value of imports has increased considerably to its highest level since 1Q14 but import growth has decreased considerably in 3Q21. Capital flight has increased in the first 9 months of 2021 to $34bn, which is the highest level in 3 years.

 Services’ Purchasing Managers Index (PMI) drops to negative due to new Covid-19 restrictions, manufacturing sector showing higher activity levels. Manufacturing sector PMI signalled growth after 5 months of decline reflecting a slight upturn in new orders and more hiring. At the same time, supply chain disruptions continued to constrain production but cost pressures alleviated compared to previous months.