Category Archives: Russian inflation

16/5/16: 1Q 16 GDP growth and other recent stats on Russian Economy

Russian GDP (preliminary estimate) shrunk 1.2% y/y in 1Q 2016, with the rate of contraction in the economy moderating from 3.7% for the full year 2015 and from 3.8% drop recorded in 4Q 2015. So the economy is still shrinking, albeit at a slower pace, and slower, yet, than consensus annual forecast for the decline of 1.7%.

Some interesting developments on inflation front too.

April CPI was up 0.4% m/m and 2.5% y/y which is well below m/m and y/y inflation recorded in April 2015 at 0.5% and 7.9%, respectively. Food inflation was running at 5.3% y/y in April 2016 against 21.9% registered in April 2015. January-April 2016 y/y inflation in food prices was 'only' 6.5% which compares against 22.2% inflation in food prices registered in January-April 2015. HICP inflation for April 2016 was 7.6% y/y and January-April 2016 period HICP inflation was 8.8% y/y, against corresponding figures for April 2015 and January-April 2015 at 17.5% and 16.6%, respectively. Amongst food products: Meat and poultry (-0.2% y/y for the first four months of 2016), Sugar (refined) (-0.2%) and Fruit & Vegetables (-1.9%) registered deflation in prices over the first four months of 2016 compared to 2015. During the corresponding period of 2015, all categories of food products registered double-digits inflation.

Consumer price index evolution in 2015 and 2016 by month
Source: State Statistics Committee

Trend toward much more subdued inflation continued in the first ten days of May 2016, based on preliminary data.

Meanwhile, imports substitution policies are starting to finally show some positive payoffs (albeit, helped heavily by massive ruble devaluations of the recent 18 months):

  • Beef production rose 4.34% in 2015 compared to 2010-2013 average;
  • Pork production was up massive 73.6%
  • Meat products are up 18.8%
  • Fish & sea food however shrink 5.82% in 2015 compared to 2010-2013 average;
  • Milk and milk products output was up 5.99% in 2010-2013 average.

1/6/15: Russian GDP fell 2.4% in January-April 2015

When Russian statistics agency published the latest data on economic growth for 1Q, the numbers came in at -1.9%, of 0.3% higher than the previous forecast by the Ministry for Economic Development (MED).

Based on the latest data from the MED, we have:

  • GDP growth at -1.4% in January (y/y figures), -1.3% in February, -2.7% in March, and -4.2% in April. 
  • April decline, therefore was faster than in 1Q 2014, resulting in GDP contraction of 2.4% y/y in the first four months of 2015.

This deflates all hopes for economic stabilisation thesis as both March and April posted accelerating rates of economic contraction, with figure for April simply impossible to ignore, even though, in part, it was driven by faster growth in April 2014.

Seasonally-adjusted data is a little more encouraging: January 2015 real GDP decline was 1% m/m, followed by 0.9% m/m drop in February, March at -0.9%, and April at -0.8%. So we do have some moderation in monthly contraction, although

In March, industrial production generally stagnated, with April posting a contraction of 1.2% m/m. In mining, March turned up positive output growth, with April again falling into contraction at -0.4%. Production and distribution of electricity, gas and water contributed positively to GDP growth in April, up 0.9%. Manufacturing posted -1.8% contraction in April. Agriculture posted zero growth in April, having expanded in 1Q 2015.

Fixed investment fell 0.7% in April, compared to -0.2% in March, construction was flat in April, after posting declines in January-March.

Retail sales were down 0.9% in April for goods trade and 0.6% in household services. Real disposable household income grew in April by 0.2%, while real wages shrunk 2%.

Meanwhile, official unemployment remained at 5.6% in April, although this figure is heavily skewed to the downside by several factors:

  1. Significant decline in the numbers of migrant workers (see;
  2. Large shifts in employment from official enterprises to grey and black economy;
  3. Demographic trends of shrinking working age population (note: Russia did return to actual population growth in 2013 and 2014, but working age population has been declining since 2006).

Total exports of good stood at USD32.7 billion or 31.3% lower than in April 2014, having rise 0.9% m/m relative March.. Imports of goods amounted to USD16.2 billion, 41.8% lower than in April 2014 and down 7.2% on March 2015. So trade balance was down 16.6% y/y to USD16.5 billion.

The good news came from a slowdown in inflation in April. In January, monthly inflation was 3.2%, falling in February to 2.2% and 1.2% in March. April inflation was 0.5% on a monthly basis and in January-April consumer prices rose 7.9%.

Full details of the latest releases in Russian are here.

11/4/15: Inflation, Wages Controls and Ruble: Welcome to Q2 Start in Russia

Russian inflation reached 16.9% in March, year-on-year, highest since 2002, despite slowing month-on-month inflation. March inflation came in at 1.2% m/m, lower than 2.2% m/m in February.

Slower m/m trend is down to Ruble re-valuation, so assuming no renewed speculative attacks on the currency, annual rate of inflation should be down at year end, around 10-12 percent range, or broadly in line with 11.4% annual inflation registered in 2014.

One key policy instrument to contain inflation (and also to correct for the adverse effect of ruble strengthening on budget balance - see below) is the decision by President Putin to suspend the legal requirement for automatic cost-of-living (COLI) adjustments to public sector wages. The decision, signed on April 6th will allow the Government to avoid hiking wages for 9 months through December 2015. President Putin's amendment also covers some of the COLI requirements on social payments adjustments. Overall, public wages and social benefits will increase in 2015 only to reflect the Budget 2015 assumed medium-term inflation target - 5.5%, well short of the actual inflation that is projected to range between 11 and 13 percent this year.

On the subject of Ruble valuations and budgetary pressures: Russian Federal Budget is set in Rubles. As Ruble strengthens against the USD and EUR, exports revenues-related taxes fall, imports declines are moderated and external surplus on trade account declines. This means potential pressure on Government deficits. Last year dramatic devaluation of the Ruble, while causing hysterical reactions abroad, actually helped the Government to achieve near balanced budget (with a deficit of just around 1 percent of GDP). This time around, the pressure is reversing.

20/3/15: Russia: Agri-food Sector and Falling Real Household Incomes

As BOFIT reported last week, 2014 marked the first year since 1999 crisis when Russian households experienced a decline in real household income. In 12 months through December 2014, real (inflation-adjusted) incomes declined by around 1% y/y, with the rate of decline accelerating to 5% y/y in November-December 2014, at the peak of the Ruble crisis. Even at the depths of 2008-2009 crisis, Russian real household incomes stayed in positive growth territory, as chart below illustrates:

One area of severe squeeze on actual (nominal) incomes has been in the public sector. As BOFIT noted: "As recently as 2013, public sector wages were rising nearly 20% a year. By the end of 2014, however, on-year nominal wage growth had fallen to zero, while inflation was running at 11.4%. Hence, real wages in the public sector fell substantially." Private sector wages shrunk by around 2% in dealt terms, y/y. Pensions rose by about 10% y/y in 2014, still below inflation increases.

As BOFIT reported: "The average 2014 wage (excluding grey-sector wages) was about €650 a month. In January this year, due to a massive drop in the value of the ruble, the average monthly wage was only about €450. The average pension last year was €220 a month, but in January, that amount had fallen to just €150."

Going forward, both public and private sectors are facing tough times in terms of wages growth. Meanwhile, composition of inflation - especially rapid inflation in food and other staples prices - is more significantly impacting retirees. As the result of inflation in food sector, Rosstat has revised its formula for the cost of consumer goods and services basket, increasing the relative weight of food by almost 1 percentage point to 37.3% of the total household spending. This means that going forward, higher inflation in food sector will have greater impact on CPI. And we can probably expect that higher inflation. 2014 was near-record crop year that is unlikely to repeat. Meanwhile, Russian agriculture is suffering from dire need of modernisation capes that is nowhere to be seen. There is some room for imports substitution via increased domestic production and via alternative supplies from outside the EU, US and other economies that imposed sanctions and suffered Russian counter-sanctions, but that substitution is severely limited by:

  1. Bottlenecks in supply expansion in Russia; and
  2. Lower exports revenues due to high oil prices.

Neither has much to do with sanctions: in the current oil price environment, lending to Russian corporates, even if it were available outside sanctions, would have been very subdued and expensive.

To lift production in the sector, the Government needs to simultaneously:

  1. Increase capital investment supports to the producers;
  2. Open and incentivise markets for agri-food production and supply sectors in Russia to foreign investment (lifting sanctions on imports of food will do absolutely nothing to food prices, as imports pricing will be linked to forex rates and cost of capital);
  3. Set up long-term targeted incentives for Russian producers to increase output quality and volumes (preferably via tax system and streamlined land ownership, as well as improved access to markets). Less arbitrary enforcement of regulations would also help; and
  4. In distribution and retailing, local authorities in a number of larger urban centres have tightened and consolidated control over retail markets, resulting in higher margins for retailers, lower margins for producers and cutting off producers' access to direct sales to consumers, especially for smaller producers. This should be reversed. 

20/2/15: January Russian CPI hit 15%. Food Inflation at 21%

Russian consumer prices data for January posted CPI of 15% y/y, with food inflation at 21% and non-food inflation at 11%. Per Economy Ministry estimates, more than 4 percentage points in inflation came from Ruble devaluation, while Russian July 2014 counter-sanctions (food imports bans) accounted for just over 1 percentage points.

As predicted in this blog, most of the price increases due to counter-sanctions will have an impact this year, rather than in 2014, in part due to lags in contracts and supplies storage, but also due to crop outruns - 2014 crops were at near historical record, and simple arithmetic on this suggests that 2015 is likely to post lower production figures. Additional break on prices was provided by some larger retail stores committing to freezing prices on foodstuffs - a measure that is unlikely to hold in the longer run. To mitigate this, the Government imposed export duties on wheat, in force from February 2015 set at a minimum rate of EUR35 per ton. This is set to run through June 2015 and my expectation is that it will rise there after. Indirect (non-tariff) measures to cut exports of foodstuffs are operating across the food sector, primarily manifesting themselves via slower issuance of exports documentation and limiting availability of transport capacity.

This came at the time when the Federal Anti-Monopoly Service were carrying out inspections of Russian retailers to determine if there were cases of price gouging. The Service was instructed to carry out monitoring of prices in an attempt to cut back inflation. At the same time, many regional authorities have been issuing regulatory caps on profit margins for retailers, also aimed at cutting back prices, while falling short of direct price controls. Note: price controls do operate - for years now - in the Northern regions.

As reported by BOFIT, Prime Minister Medvedev singled out specific concerns about the cost of drugs and medical supplies, warning "last week that medicine prices could rise as much as 20%" in 2015. Also per BOFIT, "Health ministry price monitoring found that in January regulated prices of life-saving medicines were up 4% and other drugs 15%". In this area - a note to exporters to Russia - the Government is continuing to expand the list of drugs covered by direct price controls and is currently preparing a draft regulation to control prices for medical equipment.