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Russia's Growth Expectations Fall Back to Earth

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(Bloomberg Opinion) -- Whether or not you believe the Russian economy grew 2.3 percent last year, beating the most optimistic expectations, the Russian Economy Ministry doesn’t want anyone to expect a repeat in 2019. That doesn’t mean there will be no baffling statistical anomalies this year, only that, realistically, there’s no reason for a rapid economic expansion.

Russia’s official statistical agency, Rosstat, where a new boss took over in December, reported the surprising growth number earlier this month. It was in large part the result of a big upward revision of construction data for the remote Yamal region, where a large liquefied natural gas facility was finished last year. The size of the revision raised eyebrows and led to widespread disbelief about the numbers, including among economists close to the government.

The Economy Ministry, of which Rosstat is a part, found itself in a politically difficult situation. On the one hand, it cannot openly doubt the data; on the other hand, raising unrealistic expectations isn’t a good idea, either: The higher you rise, the harder you fall. On Tuesday, the ministry published a report saying the record growth “was in large part caused by one-off factors and is not sustainable.” This year, the ministry expects Russia’s gross domestic product to increase by 1.3 percent, below the Bloomberg consensus forecast of 1.5 percent.

Apart from the Yamal “construction boom,” there were three other major contributing factors to the surprising growth, according to detailed 2018 numbers, released in recent days by Rosstat.

Oil and gas exports were one factor. A pause in Russia’s joint production-limiting effort with the Organization of Petroleum Exporting Countries boosted oil production. In the second half of the year, Russian crude output reached a record 11.45  barrels a day. Output curbs were put back in place since last month, so this growth source is out, at least for now. 

The Yamal LNG project boosted the output of liquefied gas by 70.1 percent, 10 times the 2017 rate. No comparable facilities are coming online anytime soon.

Services contributed 0.8 percentage points to the overall growth. That contribution came from two sources: A 6.1 percent year-on-year increase in the hotel and restaurant industry and a 6.3 percent jump in financial services (in both cases, the growth rate is about twice that of 2017).

Hotels and restaurants profited from the soccer World Cup, held in Russia last summer, which, according to official data, attracted 3.4 million foreign fans. No sporting events of this caliber are planned for this year.

The financial sector growth is potentially an even more depressing story. Russians’ real incomes dropped 0.2 percent in 2018, according to Rosstat. At the same time, household consumption increased 2.2 percent in constant prices. It’s conceivable that much of the consumption increase occurred on credit. According to the central bank, loans to individuals increased by 22.4 percent in 2018, a record jump since 2014.

Overdue loans actually dropped in 2018 after a big increase the previous year, and the banking sector profited from Russians’ borrowing spree. But without income growth, the loans cannot be a reliable growth engine. The Central Bank has already increased capital requirements for consumer loans, preparing for bad debts to go up.

With the government making an effort to hold down spending to keep a large cushion against international sanctions and oil price drops, its creditworthiness has increased (all three major rating agencies now consider Russian government debt investment-grade). But without increases in government spending, there are few obvious growth sources for the Russian economy this year. No major structural reforms are planned, either, and no improvements are expected in Russia’s international standing.

Given all this, it makes sense for the Economy Ministry to damp expectations. President Vladimir Putin wants Russia to grow faster than the global economy, but, creative accounting and uneven data quality aside, his technocrats cannot promise him that without real-life reasons for optimism. All they can promise is to hold the fort.

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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