Russian Economy Update, Part 4: Aggregate Investment

The following is a transcript of my recent briefing on the Russian economy.

This part (Part 4) covers outlook for aggregate investment over 2017-2019. Part 1 covered general growth outlook (link here), part 2 covered two sectors of interest (link here) and part 3 concerned with monetary policy and the ruble (link here).

From the point of Russian economic growth, investment has been the weakest part of the overall ex-oil price dynamics in recent years.

Rosstat’s most recent data suggests that the recovery in seasonally adjusted total fixed investment continued in 1Q 2017, with positive growth in the aggregate now likely for the 2Q 2017:

  • 4Q 2016 investment was down about 1% from 2015

  • Total investment rose from 22.12% of GDP in 2015 to 25.63% in 2016 and is expected to moderate to 22.23% in 2017, before stabilsing around 22.9% in 2018-2019

    • The investment dynamics are, therefore, still weak going forward for a major recovery to take hold

    • However, 2017-2019 investment projections imply greater rate of investment in the economy compared to 2010-2014 average

  • However, last year, fixed investment was down by 11% from 2014

  • About a quarter of total aggregate investment in Russia comes from small firms and the grey economy

  • Other fixed investments, which are mostly investments of large and mid-sized companies, shrank by about 1% in 2016

    • This compounds the steep drops recorded in the previous three years (down 10% in 2015 alone), so the level of investment last year remained below that of the 2009 recession

    • Investments of large and mid-sized companies within oil & gas production sector rose robustly in 2016

      • This marked the third consecutive year of growth in the sector
      • Much of the increases was driven by LNG sub-sector investments which is associated (at current energy prices) with lower profit margins
      • On the positive side, investments in LNG facilities helps diversify customer base for Russian gas exporters – a much-needed move, given the tightening of the energy markets in Europe
    • In contrast to LNG sub-sector, investment in oil refining continued to shrink, sharply, in 2016 for the second year in a row,

    • Other manufacturing investment also recorded continued sharp declines

    • The same happened in the electricity sector

    • In contrast, following two years of contraction, investment in machinery and equipment stabilised for the mid- and large-sized corporates

    • Construction sector activity was down 4% y/y in 2016, marking third consecutive year of declines

      • Exacerbating declines in 2015, commercial and industrial buildings completions fell again in 2016
      • Apartment completions also fell y/y marking the first drop in housing completions since 2010

As the chart above illustrates:

  • The forecast is for 2017-2019 improvements in investment contribution to growth, with trend forecast to be above 2010-2014 average

  • However, historically over 2000-2016 period, investment has relatively weak/zero correlation (0.054) with overall real GDP growth, while investment…

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