Russia: Positive past, cloudy future

The first official estimate of Russian GDP growth for 2018, at 2.3%, came as a positive surprise. Even after incorporating the previously announced upgrade of construction growth, we and the consensus did not expect the full-year figure to exceed the 2.0% level. The key reason for this outperformance seems to be a higher than expected revision to investment growth, which is the only component that showed improvement in the full-year estimate compared to the nine-month figure (2.3% vs. 1.9%). However, there are several reasons why this seemingly positive statistical take on Russia's recent past does not warrant an improvement in the outlook for its future:

• Even after several upward revisions, investment remains Russia's weak link. Despite a number of large state-sponsored infrastructure projects and investments in the oil and gas industry, overall investments slowed materially from the 5.5% rate seen in 2017 and their annual volume in real terms barely reached the level seen in 2008 (while private consumption, despite weakness in 2015-16, is still 16% above its 2008 levels).
• Consumption growth, even after accounting for cross-border e-commerce, showed a material deceleration from 3.0% in 2017 to 1.9%, confirming a weakening in local demand, which is unlikely to reverse any time soon given the VAT hike and slowdown in salary and retail lending growth seen at the end of 2018.
• The only component that positively contributed to the acceleration of GDP growth in 2018 vs. 2017 was net exports, which was in part due to a strong slowdown in import growth (from 17.4% to 3.8% due to weakness in the rouble and local demand) and also in part thanks to an acceleration in export growth (mainly oil and gas), from 5.0% to 6.3%, which is now in doubt because of Russia's OPEC+ commitments.
• GDP growth is not broad-based, as around 50% of 2018 GDP growth was due to sectors that account for only 25% of the economy, including commodity extraction, construction (of oil and gas infrastructure), transportation (of oil and gas products), the financial sector (servicing the flows of the external sector), and state administration.