RUSSIA’S ECONOMIC OUTLOOK AND MONETARY POLICY

RUSSIA’S ECONOMIC

OUTLOOK AND MONETARY

POLICY

FEBRUARY 2021

COVID-19 cases

2

Sources: data.humdata.org

In February the COVID-19 incidence has decreased after rising in previous months.

0

100

200

300

400

500

600

700

800

01.20 04.20 07.20 10.20 01.21

Number of new confirmed cases per million inhabitants, 7dma

USA 4 major economies of the Eurozone Russia

0

2

4

6

8

10

12

01.20 04.20 07.20 10.20 01.21

New deaths per million inhabitants,7dma

USA 4 major economies of the Eurozone Russia

4 major economies of the Eurozone – Germany, France, Italy, Spain

Global financial and commodity markets

3

Sources: Reuters, Bloomberg, Bank of Russia calculations

Accelerated vaccination rates, as well as expectations of additional fiscal support measures in certain countries, contribute tothe growth of prices in financial and commodity markets.

70

90

110

130

150

170

190

2017 2018 2019 2020 2021

Stock indices (100 = 02.01.2017)

S&P MSCI World MSCI EM STOXX SSE

0

15

30

45

60

75

90

2017 2018 2019 2020 2021

Urals price (USD/bbl)

Urals

4

Sources: Rosstat, Bank of Russia

Inflation is developing above the Bank of Russia’s forecast. In January, the annual consumer price growth rate rose to 5.2%vs 4.9% in December. This is largely related to the growth in prices in certain commodity markets and the continuing pass-through of the ruble’s earlier weakening to prices.

According to the Bank of Russia’s forecast, annual inflation will peak in February-March and decline later on. The pathof this decline will be determined by the timing of exhaustion of the effect of proinflationary factors and 2020 base effects.The baseline scenario assumes that, given the current monetary policy stance, annual inflation will reach 3.7–4.2% in 2021and remain close to 4% later on.

5.2

4.25

-1

0

1

2

3

4

5

6

7

8

9

10

11

2017 2018 2019 2020 2021

Inflation by main groups, core inflation (% YoY)and the Bank of Russia key rate (% p.a.)

CPI, core CPI, headline Food Non-food Services Key rate

Consumer prices

Inflation rates for main groups, seasonally adjusted (1)

5

Sources: Rosstat , Bank of Russia’s estimates

Columns – monthly price growth rate, seasonally adjusted, %Line – annual inflation, % (rhs); thin line – 3MMA SAAR; Red line – 4% SAAR

-1012345678910

-10123456789

10

2018 2019 2020 2021

All goods and services

-1012345678910

-10123456789

10

2018 2019 2020 2021

CPI, excluding fruit and vegetables,oil products and utility services

-4-202468101214161820

-4-202468

101214161820

2018 2019 2020 2021

Food goods

-4-202468101214161820

-4-202468

101214161820

2018 2019 2020 2021

Food goods, excluding fruit and vegetables

According to Bank of Russia estimates, current consumer inflation indicators reflecting the most sustainable pricemovements are close to 4% (annualised).Government measures constrained the growth of prices for certain goods.

Inflation rates for main groups, seasonally adjusted (2)

6

Sources: Rosstat , Bank of Russia’s estimates

Columns – monthly price growth rate, seasonally adjusted, %Line – annual inflation, % (rhs); thin line – 3MMA SAAR

012345678910

0

2

4

6

8

10

2018 2019 2020 2021

Non-food goods

012345678910

0123456789

10

2018 2019 2020 2021

Non-food goods, excluding oil products

-4-3-2-1012345678910

-4-3-2-10123456789

10

2018 2019 2020 2021

Services

-4-3-2-1012345678910

-4-3-2-10123456789

10

2018 2019 2020 2021

Services, excluding utility services

Inflation is still affected by a group of factors associated with the epidemic situation.It includes staff shortages in a number of industries, increased costs incurred by companies to comply with sanitaryand epidemiological rules, and persistent temporary delays in supplies due to disruptions in logistics chains. Theseare supply-side factors putting upward pressure on inflation.

Inflation expectations – households

7

Sources: LLC “inFOM”, Rosstat

Inflation expectations of households have abated; however, they still remain elevated compared to the pre-pandemic period.This is largely related to the increase in prices for certain everyday goods and exchange rate volatility.

12,8

10,5

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13

14

15

2017 2018 2019 2020 2021

Inflation observed and expected by households, median estimate, %

Observed inflation Expected inflation Annual inflation

Price expectations – businesses

8

Sources: Bank of Russia’s business survey, IHS Markit

Inflation expectations of businesses have not changed materially after growing over previous months.

The effect of pro-inflationary factors may exert more prolonged influence due to the previous growth in households’ andbusinesses’ inflation expectations and remaining supply-side restrictions.

45

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75

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2017 2018 2019 2020 2021

PMI survey data on producer input and output prices, diffusion index, pp

PMI Mng

PMI Services

Average

Input Prices Output Prices

-5

0

5

10

15

20

25

30

35

40

45

2017 2018 2019 2020 2021

Businesses - total Mining and quarrying

Manufacturing Agriculture

Construction Wholesale and retail trade

Transportation and storage Services

Replies of businesses to the question: “How will the prices of final

goods change in the upcoming 3 months (increase/decrease)?”,

balance of replies, % SA

Economic activity surveys

9

Sources: IHS Markit

High-frequency indicators of economic activity suggest that the economic recovery in early 2021 is ongoing. The paces ofrecovery are set to gain support from better consumer and business sentiment in the context of partially lifted restrictivemeasures and coronavirus vaccination coverage.

20

25

30

35

40

45

50

55

60

2015 2016 2017 2018 2019 2020 2021

PMI Manufacturing

PMI Manufacturing

PMI Manufacturing New Orders

PMI Manufacturing New Export Orders

20

25

30

35

40

45

50

55

60

2015 2016 2017 2018 2019 2020 2021

PMI Services

PMI Services

PMI Services New Business

PMI Services New Export Business

GDP growth and basic output indicator

10

Sources: Rosstat, Monetary policy department’s estimates

In 2020, GDP fell by 3.1%. This is less than the Bank of Russia expected earlier.

According to the Bank of Russia’s estimates, economic recovery also continued in 2020 Q4. The constraining effect of the worsening epidemic situation on the economy in Russia and worldwide was much less than expected. This is related to the targeted nature of restrictive measures and the significant adaptation of households and businesses to the new conditions.

0,7

-2,0

0,21,8

2,82,0

-3,1

-12

-8

-4

0

4

8

2014 2015 2016 2017 2018 2019 2020

Contribution to annual GDP growth, pp

Other

Imports

Exports

Changes in inventories

Gross fixed capital formation

Final consump. of the general government

Final consumption of households

GDP, %

-10

-8

-6

-4

-2

0

2

4

6

8

2017 2018 2019 2020

Contribution to annual basic output indicator growth, pp

Electricity, gas, water, and otherRetail tradeTransportConstructionAgricultureManufacturingMiningBasic output indicator with wholesale, %Basic output indicator w/t wholesale, %

Consumer demand and households’ income

11

Sources: Rosstat, Bank of Russia’s estimates

In 2020 Q4, households’ real income continued to recover.

The recovery of domestic demand will be driven by the cancellation of restrictions as the epidemic situation improves,especially in the service sector.

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2015 2016 2017 2018 2019 2020

Households real disposable money income,contribution to annual growth, pp

Mandatory payments and contributions

Other earnings (including undisclosed)

Property income

Social benefits

Enterpreneurial income

Labour remuneration

Real disposable money income, %

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

2016 2017 2018 2019 2020

Retail trade and commercial services to households,% growth on Dec. 2015, SA

Food products

Non-food goods

Retail trade

Commercial services

Employment

12

Sources: Rosstat, Bank of Russia’s estimates

In 2020 Q4 unemployment started to decline.

Opening up the borders concurrently with a gradual lifting of restrictions may lead to a recovery in the consumption of foreignservices and weaken supply-side constraints in the labour market through inflows of foreign labour force.

4,0

4,5

5,0

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6,0

6,5

7,0

-2

-1

0

1

2

3

4

2016 2017 2018 2019 2020

Unemployment and labor force

Labor force, % YoY Unemployment rate, % SA, rhs

Fiscal policy

13

Source: Federal Treasury

Fiscal measures continued to provide significant support to the economy. The growth of expenditures of the budgetary system in2020 amounted to more than 13.9%. The effect of stimulus measures is expected to continue in the first half of the year as well.Further on, the scheduled fiscal policy normalisation will reduce the extent of this influence. Nonetheless, the budget will remainexpansionary as compared to the long-term parameters provided for by the fiscal rule.

17,6

12,8

4,8

21,6

16,6

11,7

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2014 2015 2016 2017 2018 2019 2020 2021

Federal budget revenues and spending,12 month moving sum, as % of GDP

Total revenues

Non-oil-and-gas revenues

Oil and gas revenues

Total spending

Without extra revenues from the sale of Sberbank shares

-4,0

-8,8

-5,0

-5,7

-9,8

-12

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-6

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2

4

2014 2015 2016 2017 2018 2019 2020 2021

Federal budget balance,12 month moving sum, as % of GDP

Federal budget balance

Non-oil-and-gas balance

Without extra revenues from the sale of Sberbank shares

Deposit and credit market – interest rates

14

Source: Bank of Russia

Monetary conditions remain accommodative and have not changed substantially since the previous meeting of the Bank ofRussia Board of Directors. OFZ yields grew somewhat, including on the back of rising inflation expectations and climbinglong-term interest rates in global financial markets. Loan and deposit rates mainly remained unchanged.

Higher price growth and inflation expectations over recent months mean that price lending conditions have slightly eased inreal terms.

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2017 2018 2019 2020 2021

Interest rates on corporate loans in rubles, % per annum

Short-term loans, all Short-term loans, all

Short-term loans to SME Long-term loans to SME

Key rate 3Y OFZ yield

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2017 2018 2019 2020 2021

Interest rates on retail loans in rubles, % per annum

Short-term loans, all Long-term loans, all

Car loans Mortgage loans

Key rate 3Y OFZ yield

Bank lending conditions

15


-15

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-5

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5

10

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Large enterprises

Small andmedium

enterprises Mortgage loans Consumer loans

Indices of changes in certain non-price lending conditions in Q4 2020, p.p.

Loanamount

Creditterm

Req. tothe borrower

Req. tosecurity

The rangeof lending areas

Tightening

Mitigation

Minor changes

2013 2014 2015 2016 2017 2018 2019 2020

-20

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0

10

20

30

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2013 2014 2015 2016 2017 2018 2019 2020

Indices of changes in requirements to the borrower, p.p.

Large enterprises Small and medium enterprises

Mortgage loans Consumer loans

Tightening

Mitigation

In certain segments, banks continued to ease non-price lending conditions as well.

Deposit and credit market – lending and deposits

16

Sources: Bank of Russia, Monetary policy department’s estimates

Lending expansion continues. Alongside with accommodative monetary conditions, lending dynamics are influenced by thepreferential programmes implemented by the Government as well as by regulatory relaxations. When making its key ratedecisions, the Bank of Russia will assess the impact of cancelling these anti-crisis measures on monetary conditions.

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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Over 3 years 1-3 years

Up to 1 year On demand

Escrow accounts Foreign currency deposits

General change (without escrow)

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2013 2014 2015 2016 2017 2018 2019 2020

Contribution to annual growth of bank claims, pp

Revaluation of FX loansBondsConsumer loansMortgage loansLoans to enterprises for more than 3 yearsLoans to enterprises for up 3 yearsTotal loan portfolio, %Total loan portfolio, excl. FX revaluation, %

Contribution from individual elements to the annual growth

of banks' liabilities to the households, billion rubles

Balance of Payments

17


In 2020 Q4 the current account surplus contracted twofoldyear-on-year. The shrinkage of exports amid the recessionin the global economy was partially offset by the decreasein imports and the deficit of other components.

In 2020 Q4, net borrowing by general governmentand the central bank totalled 1 billion US dollars,with federal government bonds and Eurobonds placedby Russia’s Ministry of Finance accounting for thelargest portion of this amount.

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30

45

2017 2018 2019 2020

Billions of US dollars

% of GDP, movements over the year, rhs

Current account

-20

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30

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2017 2018 2019 2020

General government and central bank

Private sector

Financial account balance net of international reserves

Financial account balance*

(billions of US dollars)

Oil price assumptions

18

Source: Press release following the Bank of Russia’s Board of Directors meeting as of 12.02.2021

The Bank of Russia has slightly revised up the assumptions for oil prices in the baseline scenario: from USD 45 to USD 50per barrel in 2021-2022, taking into account the current price dynamics, and also assuming that the situation in the oil marketwill remain stable.

Urals price projections for 2023 remain unchanged (USD 50 per barrel). The longer-term equilibrium is assumed to be at the level of USD 50 per barrel.

50 50 50

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2015 2016 2017 2018 2019 2020 2021 2022 2023

Oil price path, average for the year, USD/bbl

Actual Baseline (February) Baseline (October)

Bank of Russia medium-term forecast – CPI and GDP

19

3,7

5,2

4,24 4

1

2

3

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5

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2017 2018 2019 2020 2021 2022 2023

CPI, % YoY(upper and lower limits of forecast ranges)


-3,1

-4

-3

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-1

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5

2014 2015 2016 2017 2018 2019 2020 2021F

2022F

2023F

GDP, % YoY(upper and lower limits of forecast ranges)

3.0-4.0

2.5-3.5

2.0-3.0

FFF

Bank of Russia forecast – Balance of payments

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2014 2015 2016 2017 2018 2019 2020 2021F

2022F

2023F

Current account, billions of US dollars

-150

-100

-50

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2014 2015 2016 2017 2018 2019 2020 2021F

2022F

2023F

Financial account & Reserves, $ bln*

Public Sector Private Sector Change in reserves

* In BPM6 signs. In the Financial account “+” – net lending,

“-” – net borrowing.

Key parameters of the Bank of Russia’s baseline scenario

(growth as % of previous year, if not indicated otherwise)

2020

(actual / estimate)

BASELINE

2021 2022 2023

Inflation, as % in December year-on-year 4,9 3,7-4,2 4,0 4,0

Inflation, average for the year, as % year-on-year 3,4 4,4-4,8 4,0 4,0

Gross domestic product -3,1 3,0-4,0 2,5-3,5 2,0-3,0

Final consumption expenditure -5,2 4,7-5,7 2,0-3,0 1,8-2,8

– households -8,6 5,0-6,0 2,5-3,5 2,0-3,0

Gross capital formation -4,2 3,9-5,9 3,0-5,0 2,5-4,5

– gross fixed capital formation -6,2 3,2-5,2 2,4-4,4 2,5-4,5

Exports -5,1 1,1-3,1 3,6-5,6 2,2-4,2

Imports -13,7 8,9-10,9 3,4-5,4 2,9-4,9

Money supply in national definition 13,5 10-14 7-11 7-11

Claims on organisations and households in rubles and foreign currency1 10,9 9-13 7-11 7-11

– on organisations 10,2 7-11 6-10 6-10

– on households, including 12,9 14-18 10-14 10-14

mortgage loans 21,2 16-20 14-18 14-18

Bank of Russia forecast, February 2021 (1)

21


* Banking sector claims on organisations and households means all of the banking sector’s claims on non-financial and financial institutions and households in rubles, foreign currency and precious metals, including loans issued (including overdue loans), overdue interest on loans, credit institutions’ investment in debt and equity securities and promissory notes, as well as other forms of equity interest in non-financial and financial institutions, and other accounts receivable from settlement operations involving non-financial and financial institutions and households.

Claims’ growth rates are given with the exclusion of foreign currency revaluation. In order to exclude the effect of foreign currency revaluation the growth of claims in foreign currency and precious metals is converted to rubles using the period average USDRUB exchange rate. Mortgage loans net of claims acquired by banks.

Bank of Russia forecast, February 2021 (2)

22


* Using the methodology of the 6th edition of “Balance of Payments and International Investment Position Manual” (BPM6). In the Financial account “+” stands for net lending, “-” – fornet borrowing. Due to rounding total results may differ from the sum of respective values.

Russia’s balance of payments indicators in the baseline scenario*

(billions of US dollars)

2020

(estimate)

BASELINE

2021 2022 2023

Current account 33 39 29 25

Balance of trade 89 119 116 119

Exports 330 375 389 406

Imports 240 256 273 287

Balance of services -18 -35 -41 -48

Exports 45 49 53 58

Imports 63 84 94 106

Balance of primary and secondary income -39 -45 -46 -47

Current and capital account balance 32 39 29 25

Financial account (excluding reserve assets) 50 26 12 6

Government and the central bank -2 -9 -8 -9

Private sector 52 35 20 15

Net errors and omissions 4 0 0 0

Change in reserve assets ('+' – increase, '-' – decrease) -14 13 17 19

Urals price, average for the year, US dollars per barrel 42 50 50 50

Monetary policy decision on 12 February 2021

23


On 12 February 2021, the Bank of Russia Board of Directors

decided to keep the key rate at 4.25% per annum.In December and January, prices continued togrow at an elevated pace. Demand is recoveringfaster and more sustainably than expected. At thesame time, supply-side restrictions are still in place and continueto exert upward pressure on prices. Inflation expectations ofhouseholds and businesses remain elevated. Acceleratedvaccination rates, as well as expectations of additional fiscalsupport measures in certain countries, contribute to the growth of

prices in financial and commodity markets. In this context,disinflationary risks no longer prevail over a one-year horizon, and the Bank of Russia hasincreased its 2021 inflation forecast to 3.7–4.2%.Moving forward, given the current monetary policy stance, annualinflation will stay close to 4%.

If the situation develops in line with the baseline forecast, the

Bank of Russia will determine the timeline andpace of a return to neutral monetary policy takinginto account the still high heterogeneity of current economic andprice movement trends, actual and expected inflation dynamicsrelative to the target, economic developments over the forecasthorizon, as well as risks posed by domestic and externalconditions and the reaction of financial markets.

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2018 2019 2020 2021

Key rate, % CPI, headline

RUSSIA’S ECONOMIC OUTLOOK AND MONETARY POLICY

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