Macroeconomic environment

In 2018, the world GDP growth rate slowed down to 3.0% against 3.7% in 2017: advanced economies grew by 2.2% compared to 2.3% in 2017, and emerging markets and developing economies (EMDEs) grew by 4.2% compared to 4.7% in 2017. In 2018, many EMDEs were under pressure, fueled by depreciation of national currencies and higher global interest rates.

Remaining trade tensions among largest countries influenced investors expectations. Despite the growth of Brent oil price, which reached its maximum of US$ 86 per barrel in October, a dramatic decline followed, so Brent finished the year at the level of US$ 51 per barrel (-40%), reflecting changes on the supply side (growth of oil production in the United States, OPEC countries and Russia).

Russian GDP growth accelerated to 2.3% in 2018 compared to 1.6% in 2017, supported by growth in the extraction industries, construction, transportation and logistics, and financial and insurance services.

The industrial production index grew by 2.9% in 2018. The raw materials extraction sector grew by 4.1%, while manufacturing showed less positive dynamics (+2.6%). The main growth in manufacturing came from the automotive industry (+13.3%), the pulp and paper industry (+12.6%), wood processing (+10.6%) and pharmaceuticals (+8.2). At the same time, the machinery and equipment production index declined (-0.6%).

The sanctions of the United States and the European Union (including new restrictions on Russian state and private companies, their top managers and shareholders), along with a decline in the global economy, had a certain negative impact on the Russian ruble. By the end of the year, the Russian currency had depreciated by 8% against the US Dollar and by 13% against the Euro (average RUB/USD: from 58.33 to 62.89; average RUB/EUR: from 65.90 to 74.11). Sanctions also led to an increase in the cost of borrowing and to an outflow of foreign capital from the federal loan bond market.

In 2018, consumer inflation in Russia (the Consumer Price Index) increased to 4.3%. Ruble depreciation, a harvest that was lower than the record levels of 2016-2017 and an increased gasoline price pushed up consumer inflation. The upcoming increase in VAT rate in 2019 (from 18% to 20%) also raised inflationary risks. Industrial inflation (Industrial Producers Price Index) reached 11.7%. After the decrease of the key rate from 7.75% to 7.25% in the first quarter of 2018, the Central Bank of Russia raised it by 0.25 p.p. in September and by 0.25 p.p. in December, to the initial level of 7.75%, in order to limit inflation risks.

In May 2018, the “Executive Order on National Goals and Strategic Objectives of the Russian Federation through to 2024” was signed by the President of Russia. On its basis, the Government of Russia developed 12 National Projects with total budget of Rub 25.7 trillion that will support the economic growth, the development of the infrastructure and of the human capital. Rub 18.2 trillion will come from the Federal Budget, regional budgets and state funds, Rub 7.5 trillion will be attracted from other sources.

Supported by favourable dynamics in oil prices, the surplus of the current account of Russia increased to US$ 113.8 billion (6.9% of GDP), up from US$ 33.2 billion (2.1% of GDP) the year before. Exports of oil & gas grew by 32.5%, non-energy export also showed growth by 13.6%. The negative balance of the financial account in 2018 increased to US$ 77.1 billion compared to US$ 12.9 billion in 2017. Capital outflow in the private sector reached US$ 72.1 billion versus US$ 32.4 billion in 2017; in the public sector, the capital outflow dropped to US$ 6.9 billion compared to US$ 13.3 billion the previous year. Banks’ foreign debt declined by 18.2% to US$ 84.6 billion.

The total sum of outstanding loans in the non-financial sector increased by 7.0% (from Rub 37.5 trillion at the end of 2017 to Rub 40.2 trillion at the end of 2018), and the outstanding loans of households increased by 22.0% (from Rub 13.2 trillion to Rub 16.1 trillion). The weighted average interest rate on long-term corporate loans (in rubles) declined slightly from 9.45% in January 2018 to 9.33% in December 2018.

The Russian Budget showed a surplus of Rub 2.7 trillion, equal to 2.6% of the GDP. Budget revenue increased by 29%, while spending grew by only 2%.

In 2018, Russia decreased its external sovereign debt by 1.3% to US$ 49.2 billion. The total external debt of the Russian Federation (both government and corporate) decreased by 12.4% (from US$ 518 billion in 2017 to US$ 454 billion in 2018). At the same time, the ratio of external debt to GDP reached its minimum level of 27.5% since 2000. The international reserves of Russia increased by 8.4% and reached US$ 468.5 billion. For the first time in Russian history, international reserves exceed external debt.

Despite uncertain economic conditions, the MOEX Russia Index increased from 2,110 points at the end of 2017 to 2,369 points at the end of 2018 (+12.3%), with a total capitalisation of Rub 9.8 trillion. At the same time, as a result of depreciation of the ruble to the US dollar, the RTS Index fell from 1,154 points to 1,069 points (-7.4%) during 2018, with a total capitalisation of US$ 140.5 billion.

A major decision made on the labour market in 2018 was to increase the retirement age by 5 years (to 60 years for women, 65 years for men). The unemployment rate declined to a historical low of 4.8% in 2018 (5.2% in 2017). The total labour force decreased slightly to 76.2 million people (<1%) in 2018.