Russia: Supply disruption risks now on the agenda

  • Rosstat reported that 3Q20 GDP contracted 3.4% y/y, supportive of our 3.8-4.0% y/y 2020 GDP contraction forecast
  • The 12.3% y/y decline in energy extraction in 3Q20 and 8.0% y/y spike in the financial segment
  • Reaction to this year’s disruption risks will set the disinflationary landscape for 2021
Russia: Supply disruption risks now on the agenda

Rosstat reported that 3Q20 GDP contracted 3.4% y/y (9M20 GDP -3.4% y/y), supportive of our 3.8-4.0% y/y 2020 GDP contraction forecast: Following the initial estimate on 12 November that 3Q20 GDP contracted 3.6% y/y, Rosstat has now upgraded it slightly to -3.4% y/y, putting the 9M20 figure at the same 3.4% y/y contraction. Given the second wave of pandemic and the likely deterioration in economic activity in November-December, we believe that the better-than-expected 3Q20 result underpins our 3.8-4.0% y/y GDP contraction forecast for this year.

The 12.3% y/y decline in energy extraction in 3Q20 and 8.0% y/y spike in the financial segment came in line with expectations … There are several large sectors which continued to form the 3Q economic landscape in the same way they did in 2Q20. The energy extraction sector is one part of this story: following the OPEC+ deal, this segment posted a 12.8% y/y contraction in 2Q20 followed by a 12.3% y/y decline in 3Q20 and it is expected to deliver around a 10% y/y contraction for the full year given the 8.6% y/y decline in 9M20. On the positive side of this story, the financial/insurance industry continued to deliver the fastest growth of 6.1% y/y in 2Q20 and 8.0% y/y in 3Q20, resulting in an 8.0% y/y increase for 9M20. The dynamics of these two segments will continue to form a predictable axes of economic activity entering 2021.

… while a modest 0.8% y/y healthcare growth in 3Q20 still came as a negative surprise: In our commentary on the 2Q20 we have persistently mentioned our surprise at the poor performance of the healthcare industry which posted an 8.5% y/y contraction in 2Q20 and where 3Q20 growth reached just 0.8% y/y (putting 9M20 at -2.2% y/y). This represents a poor result, especially given that the state administration and security segment was the second best performer after the financial segment with 1.9% y/y growth for 9M20, including 1.8% y/y increase in 3Q20. We see this as a sign that the state’s ability to support the medical services was not as efficient as the state’s efforts to implement control systems, including QR-codes in the city of Moscow.

Residential construction in Moscow down 11% y/y in 10M20 as the number of migrant workers declined sharply: Probably the most important reason to pay attention to the sectoral growth breakdown is because the economic policy focus is now shifting to the issue of disruption between demand and supply. The first area of disruption is the construction segment where under the rapid 20% y/y increase in the mortgage market this year, real estate prices for newly constructed apartments rose by 11% YTD for 9M20, including a 17% YTD increase in prices in Moscow and the Moscow region. Looking into residential construction details, the 10M20 Rosstat data points to a 1.1% y/y decline in the volume of residential construction in Russia; however, this relatively modest figure masks an 11% y/y contraction in construction in the city of Moscow and a 22% y/y slump in construction in the Moscow region. One of the reasons for this disruption is the decline in the number of migrant workers – for 10M20, the number of foreign citizens in Russia registered by the Russian authorities was just 8.3 mn versus 16.4 mn in 10M19. This puts construction in the Central Federal District at -12% y/y; out of eight federal districts, another posting a decline in construction volumes is the South Federal District. Together, the central and south districts represent around 40% of the residential construction market; it is thus not surprising that the decline in supply has caused asset price inflation.

Cabinet decision to put ceiling on sugar and sunflower oil prices is a reaction to disruption in the agricultural segment: Another area of disruption can be observed in the food market where the cabinet was forced to introduce price ceilings on two products – sugar for which prices went up 65% y/y in November and sunflower oil for which prices were up 24% y/y. This spike in prices seems to be due to a combination of declining production (Russian sugar beet production is down 30-40% y/y) as well as growing exports. While the food segment is vulnerable to seasonal price dynamics, it still comes as confirmation that the balance of demand and supply is becoming a crucial issue during a period when active demand stimulus are deployed.

Reaction to this year’s disruption risks will set the disinflationary landscape for 2021: The pickup in food or asset price inflation points to two state policy implications. First, it suggests that it is worth paying attention not just to consumer price growth, but to monitor inflation in the broader sense of the word. The environment of monetary stimulus used in large countries is expected to introduce inflationary risks to the agenda and in this environment any supply side disruption will translate into a strong price reaction. This list should also include monitoring of the equity market, where there are high risks of the bubble building in the coming years. The second point is that to deal with these risks in 2021 the Russian cabinet will have to pay more attention to the supply side - while the 2020 pandemic puts the focus of the economic policy on the demand side, 2021 should provide the opportunity to solve the bottleneck in production. This reinforces our view that in Russia disinflationary risks are on the rise for 2021.

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