25 January 2019
“Cloudy today, sunny tomorrow?”

Renaissance Capital provides its economic forecasts for Russia, and the CIS and regional economies for the next two years, and believes 2020 may turn out to be the best year for Russia of the past eight years

Moscow, 25 January 2019 – Renaissance Capital, a leading investment bank in emerging and frontier markets, hosted a press breakfast for core media outlets, where Oleg Kouzmin, Renaissance Capital’s Russia and CIS Economist, shared his vision of Russia’s economic prospects, as well as those of the CIS and regional economies.

Oleg believes that this year is going to be more challenging for Russia than 2018, with softer GDP growth of just 1.2%; cooling consumer/investment demand growth (1.7%/1.5%); a 5% weaker year-average exchange rate (RUB66.3/$); and inflation rising above the policy target (4.7%). His base case assumes a $65/bl Brent oil price, but does not change much with different oil price assumptions.

However, Oleg pointed out that the slowdown in GDP growth and other macro indicators is not likely to affect the Russian economy dramatically.

Renaissance Capital’s forecast of Russian GDP for 2020 (2.4% with oil at $60/bl) exceeds Bloomberg consensus (1.7%). Oleg expects both a cyclical and structural recovery, namely the rebound of consumer and investment demand when the one-off effects of the 2019 VAT increase fade away. Also, Oleg believes that the increase in the retirement age will add a further 0.2-0.3 ppt to economic growth.

Oleg Kouzmin, Russia and CIS Economist, Renaissance Capital, commented: “Certainly, underlying risks for our forecasts are still there, and they are mainly on the external side, including lower investor appetite for emerging market assets, and, especially potential new sanctions, which are now an ever-present reality.”

Oleg noted that any new sanctions introduced by the Trump administration would not be as bad as those that may be imposed by the US Congress with respect to newly issued state debt. Renaissance Capital has prepared ‘soft’ and ‘hard’ scenarios of potential sanctions, to assess the scale of non-residents’ outflows from Russian financial assets (both sovereign debt and corporate equities), which could reach as high as RUB2.5trn or RUB5trn, respectively.

Oleg Kouzmin said: “We do not attempt to guess whether there will be any new sanctions or not. There is no consensus on this matter in the market either. However, we know that the potential negative impact of sanctions will be realised via the non-residents’ outflows from Russian securities.”

It will be hard to avoid some cooling in the CIS economies in 2019, due to a weaker Russian performance, lower commodity prices and the end of a cyclical upturn. In the longer term, however, five of nine CIS/regional economies could benefit from greater or smaller structural changes (Uzbekistan, Armenia, Georgia, Kazakhstan, and Belarus).

With regard to 2019/2020 only, Oleg singles out four major macro stories in the region. He believes Georgia and Kazakhstan will perform the best, with Armenia and Belarus looking fine, too. The outlook is uncertain for Azerbaijan, Ukraine and Tajikistan (although Azerbaijan’s strong credit status should be kept in mind). Uzbekistan and Moldova are still ‘undiscovered stories’ for international investors.

Maxim Orlovsky, Managing Director, Equities, Renaissance Capital, also contributed to the dialogue, offering a hands-on analysis of the international political background and the financial sector. Maxim explained that despite the threat of sanctions, Russia benefits from its budget rule – funneling excessive oil profits out of the economy and thus supporting the growth of non-resource industries, and from its accumulated reserves which now exceed Russia’s foreign debt. The journalists at the event demonstrated a strong interest in Russia-China relations, and the shift of Russia’s economic vision to the East.

Maxim Orlovsky commented: “There are many high-profile statements regarding our financial relations with China. These relations, however, can hardly be considered well-established, apart from several individual projects. It is worth noting that China remains the key market for Chinese investors. In addition, when it comes to sanctions against Russia, Chinese companies and banks take a tougher stance than their Western colleagues.”

The press briefing also focused on international investors’ sentiment towards the Russian market, alongside prospects for the Russian investment banking sector.

Maxim Orlovsky added: “No doubt, the sanctions are pushing Russia off international investors’ radars. There are fewer funds investing into Russia now. This, however, spurs reallocation of funds within the economy. Currently, up to 40% of Moscow Exchange trades are generated by individuals, rather than corporates. This means that the financial market can evolve even if it is isolated.” 

Maxim Orlovsky pointed out that after a scaling-back in investment banking in Russia in recent years, the sector seems to have reached a balance, and further cutbacks are unlikely down the road. Also, with market expectations having shifted from a tough monetary policy in Europe and the US towards softer developments, we are now witnessing investor optimism returning to emerging markets to some extent. Summing it all up, he said the next several years are going to be “thrilling” for financial markets.