Looking Back on 2012: for Russia, More Good than Bad

There were quite a number of events last year, some represented positive developments while others can be considered negative. The list below breaks the more important events into several theme categories and lists the positives and negatives for each.

Economy – Positives
Headline growth will be close to that expected at the start of the year, i.e. between 3.5-4.0 percent, meaning that Russian growth is relatively good in the EM (Emerging Market) asset class and better than DM (Developed Market) economies. The current account surplus is not far off 2011’s level (expected around $90 billion) and the budget will be marginally on either side of breakeven (depends on level of spending in December).
Consumer activity, service sector expansion and some manufacturing efficiency gains are driving the growth rather than extractive industries. This gives very good support for our earnings assumptions for these themes.
Overall, sovereign and corporate debt levels have not materially changed all year and, in total, average less than 30 percent. The change in the Central Bank’s approach to managing the currency has been much more obvious this year and the greater flexibility seen in counterbalancing the oil price move, in particular, is one of the reasons we have seen greater resilience in the Russian economy to the slowdown and threat from Europe.

Economy – Negatives
Inflation has been higher than anticipated at the start of the year. We started out expecting less than 5.0 percent, but it will end the year close to 6.5 percent. This is partly a result of imported food inflation but a lot of it is linked with the election spending and higher public sector salaries. The Finance Ministry’s actions, often at odds with those of the Central Bank, tightened the market and made the cost of debt more expensive.
The Central Bank hiked its benchmark rate as a result of the higher inflation rate, which was also unexpected. The government has run with a “rainy day” mentality, i.e. constantly preparing for a crisis to come, which means the Finance Ministry has conducted unnecessary money market operations that have squeezed the liquidity available to non-state sector borrowers. This has restricted some investment activity.

Markets in 2012