East Office Quarterly report for 4Q19 and 2019

Economic growth in 2019 pressed by weak consumption and
falling exports

Recent events in 2019 for the Russian economy

.Russian government resigned in January and President proposed changes to the Constitution. New PM is Mikhail Mishushtin, a former Tax Office chief with a strong reputation as an efficient digitalization-oriented technocrat. Changes to the Constitution are seen as a start to the transition process leading to 2014, when Putin needs to step down. Constitutional changes will be put under a public vote most likely in April.

• GDP growth in 2019 estimated at 1.3 %. First estimate of GDP growth shows significant deceleration compared to 2018 (2.3 %) mostly driven by contraction of household demand in the first half due to the VAT rate hike and falling exports. Agriculture was the only sector showing stronger growth in 2019.

• Industrial production growth adversely affected by both domestic and foreign low demand and lagging state investments. Extractives sector growth fell the most in 2019 due to the high base level from oil exports last year, OPEC+ production cut agreement and turmoil in commodity prices affected by the US-China trade dispute.

• Rouble stronger and more resilient in 2019. Rouble appreciated in 2019 around 11 % against the dollar and has remained surprisingly stable throughout the year given the fluctuations in oil price, most recently due to the coronavirus outbreak.

• Inflation fell to 3 % in December driven by weaker increase in food price and a stronger currency. A sumptuous yield, strong RUB and has decelerated inflation in in the second half of. Inflation is expected to accelerate during 2020 due to large increases in public expenditure.

• CBR lowered its key rate to 6.0 % in January as inflation decelerates close to record lows. CBR’s move aimed at stimulating weakening household demand and investment activity.

• Current account surplus contracts due to a weaker trade balance. Export value decreased by -6 % (y/y) in 2019, while imports continued to grow (2.5 %) supported by stronger currency.

• Disposables income growth remains weak at 0.8 (y/y) for 2019 despite a low base level from the previous years. Real disposable incomes still remain below 2013 levels. Real wages growth decelerated considerably to 2.5 % in 2019 compared to 7.4 % in the previous year. President has promised extensive monetary support for low income families that should boost disposable incomes in 2020-2024.

• Unemployment remains record low and workforce declining faster. The unemployment rate remained at a record low level of 4.5 % since September partly due to the accelerated contraction of the workforce.

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