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Goldman Sachs
Clemens Grafe
Chief Russian Economist and Co-Head of New Markets Economic Research
Goldman Sachs Global Investment Research 2
Russia: Economics under uncertainty
Clemens Grafe +7 495 645 41 98
October 2014
Investors should consider this research as only a single factor in making investment decisions. For Reg AC certification and other important disclosures, see the Disclosure
Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc.
Goldman Sachs Research
Goldman Sachs Global Investment Research 3
Global
Goldman Sachs Global Investment Research 4
Global growth set to accelerate, led by U.S.
Global growth set to accelerate to 3.5% after 3% in 2012-14, driven by above-
trend U.S. growth, gradual recovery in euro area in emerging markets
Inflation to remain benign, due to output gap and downside to commodities
Fed to hike rates in 2015Q3, UST yields rising slowly: 10y at 3% at end-2015
Real GDP growth: GS vs. Consensus
GS Consensus GS Consensus GS
USA 1.6 2.3 2.2 2.2 2.1 3.2 3.1 3.0
Euro area 1.6 -0.6 -0.4 0.7 0.9 1.0 1.4 1.7
Japan -0.5 1.5 1.5 1.0 1.2 1.2 1.3 1.5
UK 1.6 0.7 1.7 3.2 3.1 3.0 2.6 3.0
Brazil 2.7 1.0 2.5 0.2 0.4 1.3 1.1 2.6
China 9.3 7.7 7.7 7.3 7.4 7.1 7.1 6.8
India 7.7 4.8 4.7 5.3 5.5 6.3 6.2 6.6
Russia 4.2 3.5 1.3 0.5 0.1 1.5 0.8 4.8
BRICS 7.6 5.9 5.9 5.4 5.0 5.8 5.3 6.2
Emerging Markets 7.0 5.4 5.2 4.5 4.5 5.0 5.1 5.7
Advanced Economies 1.7 1.2 1.4 1.9 1.9 2.4 2.4 2.5
World 3.8 3.0 3.0 3.0 3.0 3.5 3.6 3.9
*Consensus Economics September 2014
Source: Goldman Sachs Global Investment Research
2015 2016%yoy 2011 2012
20142013
Goldman Sachs Global Investment Research 5
CEEMEA outlook more mixed
CEEMEA growth only to rise modestly
– Russia and South Africa to recover somewhat
– Turkey to slow down (below consensus)
– CE-3 growth to remain close to unchanged
Inflation pressures to remain subdued across most of the region
Real GDP growth: GS vs. Consensus
2016
GS Consensus GS Consensus GS
Czech Republic 1.8 -0.9 -0.9 2.6 2.6 2.4 2.6 2.6
Hungary 1.6 -1.7 1.2 2.2 3.1 2.0 2.3 2.2
Israel 4.6 3.4 3.4 2.8 2.8 4.0 3.4 3.6
Poland 4.5 2.1 1.6 3.4 3.2 3.3 3.4 3.5
Romania 2.2 0.7 2.4 3.1 2.5 3.4 3.2 3.5
Russia 4.2 3.5 1.3 0.5 0.1 1.5 0.8 4.8
South Africa 3.6 2.5 1.9 1.3 1.7 2.8 2.8 3.6
Turkey 8.8 2.1 4.1 3.0 3.0 2.2 3.5 5.8
Ukraine 5.1 0.2 -0.1 -8.0 -6.5 1.0 0.6 3.4
BRICS 7.6 5.9 5.9 5.4 5.0 5.8 5.3 6.2
CEEMEA 4.9 2.7 2.4 2.2 1.2 2.5 2.5 4.5
Advanced Economies 1.7 1.2 1.4 1.9 1.9 2.4 2.4 2.5
World 3.8 3.0 3.0 3.0 3.0 3.5 3.6 3.9
*Consensus Economics September 2014
Source: Goldman Sachs Global Investment Research
20152013%yoy
20142011 2012
Goldman Sachs Global Investment Research 6
Diverging inflation trends in CEEMEA
Inflation is above target in Russia, Turkey and SA, but below in CEE and Israel
Momentum negative across the region, with exception of Czech and Romania
Upside risks in Turkey, Russia and SA from inflation expectations and FX
Downside risks across region from lower commodity/oil prices and demand
Broadly benign inflation outlook due to disinflationary pressure from output gaps
Headline Momentum Core Momentum TRIM Surprise GS Consensus
Czech Republic 2.0 +/- 1.0 0.6 + (+) 0.9 + (+) 1.7 + (+ +) 0.8 0.5
Hungary 0.2 unch. (+) 2.4 - (+) 1.0 (+) 1.1 0.2
Israel 2.0 +/- 1.0 0.0 - (+) 0.0 - (unch.) 0.2 - (-) 0.4 1.0
Poland 2.5 +/- 1.0 -0.3 unch. (+) 0.5 unch. (unch.) 0.8 ( ) 0.2 0.3
Romania 2.5 +/- 1.0 0.8 - (-) 0.5 + (-) 1.7 - - - (-) 1.8 n/a
Russia 5.0 +/- 1.5 7.6 - (-) 8.0 - (-) 7.3 ( ) 8.0 7.5
South Africa 6.4 unch. (unch.) 5.8 unch. (unch.) 6.5 + + (-) 6.9 6.3
Turkey 5.0 +/- 2.0 9.5 - (unch.) 9.7 unch. (unch.) 9.3 + (+ +) 10.1 8.8
Notes: (1) Core inflation from national sources (SA for Czech Republic, Hungary, Turkey; NSA elsewhere); (2) Objective is midpoint of central bank target
range; (3) Momentum is 3mma annualised inflation, threshold for being "unchanged" is change of less than 10% of target midpoint; (4) Surprise is to
Bloomberg consensus forecast (+ indicates headline inflation up to 1 s.d. above consensus); (5) Momentum/surprise from previous month in parentheses.
Forecast, %yoy (end-2014)Objective
2014
Realised inflation, %yoy (Aug-14)
3.0 - 6.0
3.0
Goldman Sachs Global Investment Research 7
Russia
Goldman Sachs Global Investment Research 8
Russia: Main views
Growth has weakened due to sanctions and slowdown in consumer, but
set to bottom out around zero in late 2014 and recover gradually in 2015
Inflation has risen sharply due to food import bans, but should decline
next year on a widening output gap, enabling the CBR to ease policy
Current account has been improving (to c. 3.7% of GDP in Q3) with
slowing domestic demand and weaker Ruble; may need to rise further
to cover external refinancing needs as well as capital outflows
Ruble will remain weak, how weak depends on oil prices
Outlook hinges on sanctions/geopolitical situation not worsening further
and also on oil price dynamics (we continue expect stabilization)
Goldman Sachs Global Investment Research 9
Weak growth but gradual recovery in 2015
Cyclical slowdown in growth in 2012-2013H1, driven by withdrawal of fiscal
stimulus, slower external demand, and rising real rates (falling inflation)
Growth recovered to 2% in Q4-2013 and was set to rise to 3% in 2014, and we
expected rebalancing away from consumption toward investment
Instead, the economy was hit with a geopolitical shock, causing investment to
fall, accelerating slowdown in consumer and tightening financial conditions
We see growth and consumption bottoming out in H2-2014 and rising gradually
in 2015 to 1.5%, with stronger investment and lower inflation/policy easing
We continue to see trend growth at 3-3.5%, on oil and gas volume growth driven
by changes to tax structure designed to incentive exploration and production
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Russia
Emerging Markets
Advanced Economies
World-4%
-2%
0%
2%
4%
6%
8%Household consumptionGovernment consumptionInvestmentChange in inventoriesNet exportsGDPFinal domestic demand
Goldman Sachs Global Investment Research 10
Financial conditions have tightened significantly potentially costing
150bps of growth on 4 quarter ahead basis.
RUB ZAR ILS CZK PLN HUF TRY RON
Real (ex ante) 3-month interbank rate 28% 34% 33% 45% 38% 27% 40% 38%
Real (ex ante) 5-year sw ap rate 49% 34% 33% 19% 33% 45% 31% 33%
Private interest spread 14% 17% 16% 23% 19% 13% 20% 19%
5-year CDS spread 0.3% 0.6% 0.6% 0.6% 0.7% 0.6% 0.7% 0.6%
REER 8% 9% 9% 12% 10% 14% 9% 10%
House price grow th (past tw o years) 0% 6% 8% 0% 0% 0% 0% 0%
- Financial conditions tightened by about 300bps in March, possibly lowering growth by 150 bps 4 quarters
ahead.
- The private credit spread continues to decline, indicating no significant impact on liquidity yet.
- Financial conditions in Russia are disproportionately dependent on the long end of the yield curve.
- Fiscal policy has been tightened as well by about 0.5% of GDP, explaining another 0.5ppt slowdown
-14.0%
-13.0%
-12.0%
-11.0%
-10.0%
-9.0%
-8.0%
-7.0%
-6.0%
01
-11
05
-11
09
-11
01
-12
05
-12
09
-12
01
-13
05
-13
09
-13
01
-14
05
-14
Non oil deficit
Goldman Sachs Global Investment Research 11
Sanctions: Progressive tightening
Measures so far 1. Asset freeze/travel bans on individual entities
2. Restrictions on debt (and in some cases equity) issuance in financial and energy sectors
3. Restrictions on oil/gas exploration and dual-use technology exports
Possible next steps (in growing degree of severity, with the latter two unlikely) 1. Restrictions on sovereign financing
2. Move into derivative products and restrictions on financing for <30 days
3. Restrictions on USD settlement and/or access to SWIFT
4. Restrictions on oil/gas or other sector exports
Effects so far – Generate uncertainty among businesses/consumers, spurring Russian and foreign capital outflows
– Restrict access (de jure and de facto) to external financing
– Tighten financial conditions -- both domestic, due to rate hikes and tighter liquidity, and foreign
– Long-run impact on oil and gas volume growth (post-2018), if sanctions remain in place
Impact: 300bp of FCI tightening ~= -1.5ppt on growth + effect of outflows
Goldman Sachs Global Investment Research 12
The shock of sanctions
-20
-15
-10
-5
0
5
10
15
20
2011 -Q1
2011 -Q2
2011 -Q3
2011 -Q4
2012 -Q1
2012 -Q2
2012 -Q3
2012 -Q4
2013 -Q1
2013 -Q2
2013 -Q3
2013 -Q4
2014 -Q1
2014 -Q2
2014 -Q3
Financial account Assets Liabilities
% of GDP sa
- Counterintuitively, the sanctions so are have triggered a reduction in the deficit on the
captial account.
- However this is unlikely to be sustainable. The adjustment has been smoothed by the
banking system re investing some of their external assets domestically. With external
assets being a limited resource the inflows are unlikely to last.
-4
-3
-2
-1
0
1
2
3
4
5
6
2011- Q1
2011- Q2
2011- Q3
2011- Q4
2012- Q1
2012- Q2
2012- Q3
2012- Q4
2013- Q1
2013- Q2
2013- Q3
2013- Q4
2014- Q1
2014- Q2
2014- Q3
Banks assets Banks liabilities Banks net
% of GDP sa
Financial account improved in Q2/Q3 Driven by inflows through the banks
Goldman Sachs Global Investment Research 13
The sanction shock ctd.
-20
-15
-10
-5
0
5
10
15
2011 -Q1
2011 -Q2
2011 -Q3
2011 -Q4
2012 -Q1
2012 -Q2
2012 -Q3
2012 -Q4
2013 -Q1
2013 -Q2
2013 -Q3
2013 -Q4
2014 -Q1
2014 -Q2
2014 -Q3
Other assets
Other liabilities
Other net
Large oil M&A transaction
%GDP
- On the corporate and household side, there is instead relatively little change, while the
corporates are deleveraging, the main drag comes from the change in external assets,
which always shows a 5% of GDP outflow.
- We think Russia will need to have a current account of close to 5% of GDP in 2015 to
balance the impact of the sanctions.
- This adjustment is well underway with the current account surplus at 3.7% of GDP s.a. in
Q3-14, up from 1% of GDP in mid 2013.
-10%
-5%
0%
5%
10%
15%
20%
10 11 12 13 14
Trade Services
Income Other
Current account
%GDP sa
Goldman Sachs Global Investment Research 14
Fiscal benefits
- Given the pressure on the BOP that translates into a weaker Ruble, there is relatively
little impact on the budget.
- What matters for the budget is primarily the price of oil in Ruble not in USD.
60
70
80
90
100
110
120
130
140
2000
2500
3000
3500
4000
4500
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Brent (Rub/bbl) Brent (US$/bbl)
Goldman Sachs Global Investment Research 15
Russia Potential growth in our view is still 3-3.5% but
under risk from domestic policy/escalation of sanctions
0
0.5
1
1.5
2
2.5
3
3.5
00.10.20.30.40.50.60.70.80.9
1
Fin
ance
/Re
al e
stat
e
Uti
litie
s
Pu
blic
Ad
min
/Def
ense
Tran
spo
rt/C
om
mu
nic
atio
n
Man
ufa
ctu
rin
g
Trad
e
Tota
l
Co
nst
ruct
ion
Hea
lth
/Co
mm
un
ity
Serv
ices
Agr
icu
ltu
re
Edu
cati
on
Min
ing
and
Qu
arry
ing
Labor productivity index in 2004 (blue) and 2013 (red), mining on rhs axis
Russia grew by raising productivity in private driven sectors, risk is it will grow by reallocating resources to energy
Goldman Sachs Global Investment Research 16
Food import bans have driven inflation higher
Inflation rose in the past 12 months due to food shock related to import bans
(periodic bans from Q4-2013 through to Aug. 2014 counter-sanctions)
Our narrow measure of core inflation is up 1ppt in past year, with 20%
depreciation vs. basket (16% depreciation vs. EUR), consistent with below 10%
and relatively well behaved FX pass-through
Food inflation should peak in Q4 and see end-year inflation at around 8%
6.1
8.0
1.8
0.3 0.3
5.5
6.0
6.5
7.0
7.5
8.0
8.5
CPI Sep-13 Food Goods (non-food) Services CPI Sep-140.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
10 11 12 13 14 15
CPI
Core (GS narrow measure)
Food
Goods (non-food)
Services
%y oy
Goldman Sachs Global Investment Research 17
Disinflationary impulse from output gap
We are now seeing declining momentum in all categories but food, linked to
disinflationary impulses from lower wage growth and widening output gap
Tight fiscal policy has caused public wage growth to fall in line with average
wages, while private sector wage growth is now negative in real terms
Inflation expectations have remained relatively well-behaved, considering the
dynamics in realized inflation and FX depreciation
We expect inflation to decline toward the CBR’s 4.5% inflation target in 2015
0
1
2
3
4
5
6
7
8
9
10
70
75
80
85
90
95
Last month
Next month
Headline infla tion (rhs)
%y oyIndex
Q: In y our opinion, in the last (next) month the prices of basic products, goods and serv ices in general increased, decreased or remained unchanged?
0
5
10
15
20
25
09 10 11 12 13 14
Tota lPrivatePublicCore inflation (Rosstat)
%y oy , 3mma
Goldman Sachs Global Investment Research 18
Monetary policy: Easing cycle in 2015
Inflation target of 4.5%+/-1.5% next year (4% thereafter) and floating Ruble
CBR has hiked rates by 250bp this year and we forecast one further 50bp hike
Ruble liquidity has recently loosened somewhat and the interbank rate has
fallen away from the FX swap rate, perhaps due to slowing loan growth
We forecast 250bp of rate cuts next year bringing the policy rate to 6% and
reversing the tightening of financial conditions this year
0.00
2.00
4.00
6.00
8.00
10.00
10 11 12 13 14 15
Deposit RepoFX swap InterbankCPI CPI forecastRepo forecast Target
92
94
96
98
100
102
104
106
108
110
10 11 12 13 14 15
Russia FCI
Average post-crisis
Average 2012-13
300bp
Goldman Sachs Global Investment Research 19
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client relationships.
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