Table of Contents
Russia v Inflation
- In October 2024, the Bank of Russia increased the key rate by 200 bps to 21.0%, analyst consensus was the rate would be raised to 20.0%
- The Bank will meet again on December 20 and will likely another rate hike to 22–23%
- the Bank of Russia expects the rate next year to be in the range of 17–20%
- The average inflation forecast for 2025 has been raised by 1.5 p.p. to 6.1–6.8%.
- Thus, the average real interest rate next year is forecasted to be above 10%
- the bank noted that annual inflation in 2024 will range between 8.0–8.5%
- The Bank of Russia raised its inflation forecast for the end of next year, which will remain above the target in the range of 4.5–5.0%
- This is due to the increased current inflation rate as well as the proposed indexation of utility tariffs in 2025 at the rate of 11.9%, growth in the utilization fee, growth of railway tariffs, which exceeds the inflation target.
The CBR did not change the forecast of growth rate of Russian GDP in 2024–2027. However, it slightly changed the dynamics of the GDP component on expenditures.
- The growth rate of household consumption increased by 0.5 p.p. to 4.5–5.5% which is consistent with the rapid turnover of retail trade (+7.8% yoy for the first 9 months of 2024) and paid public services (+3.5% yoy for the first 9 months of 2024).
- Growth rate of gross capital formation (GFCF) was reduced by 1.0 p.p. to 6.0–8.0%, due to higher rate and actual investment performance in equity (GFCF increased by 7.2% at Q2 end).
The Bank of Russia has significantly improved its forecast for monetary indicators in 2024:
- the expected rate of growth of money supply and credit to the economy rose by 4.0 p.p.
- the demand from the banking system to institutions grew by 6.0 p.p.
- The reason for the revision was the continued rapid growth of lending, being a major factor in the expansion of the broad monetary supply
The rapid increase in the money supply in the Russian economy remains an important factor in the increased inflationary pressure
Inflation for the preceding 12 months at the end of October was 8.5% which is 0.1 p.p. below September and 0.6 p.p. below the peak in July.
The rise in food prices (consistent with their greater weight in the consumer basket) continues to be the largest contributor to annual inflation. However, the contribution of services to annual inflation is increasing and comparable with the contribution of foods (3.1 p.p. for services vs 3.4 p.p. for foods)
In October, consumer prices increased by 0.75% month over month. Growth in prices for foods (0.47 p.p.) was the main contributor to October inflation, with fruit and vegetables becoming seasonally more expensive in October, increasing October inflation by 0.07 p.p.
Growth in prices for butter makes an increasingly significant contribution to inflation:
- the share of this component in the consumer basket is only 0.73%
- however, the price growth in October by 6.6% resulted in the contribution of butter prices to October inflation totaled to 0.05 p.p. and its share in annual inflation reached 0.2 p.p. by the end of October.
- Over the previous 12 months butter prices went up by 29.7%, which is explained by the increase in production costs and consumption growth. By the end of October, according to the Russian Ministry of Agriculture, prices in the wholesale segment began to decline. Data for the first 2 weeks of November indicate that in the retail segment butter continued to grow in price (+2.1% by the end of October).
For 4 months in a row, the rise in non-food prices has added about 0.2 p.p. to monthly inflation. In October, the contribution of services to inflation amounted to only 0.06 p.p., but it was almost entirely explained by a decline in prices for foreign tourism services (by 11.9%), reducing monthly inflation by 0.09 p.p.
Seasonally adjusted (saar) annualized consumer inflation in October amounted to 8.6% saar, which coincides with the September value and is close to August (8.8% saar).
Thus, in the previous 3 months there has been neither acceleration nor deceleration of current inflation: the growth rate of consumer prices remains slightly above 8.5%.
In October, components of seasonally smoothed inflation grew at approximately the same rate as in September: growth in food prices increased, prices for services fell, and dynamics of prices for non-foods did not change.
An excess of aggregate demand over aggregate supply (i.e. a positive output gap) remains the key factor of increased inflationary pressure. Real GDP growth in Q3 2024 by 3.1% y/y (excluding seasonality and in terms of annualized GDP growth rate grew by 2.6% in Q3), resulted in an increase in the output gap by 0.1 p.p. to (1.4%), which was one of the reasons for a consistently high inflationary background in summer and autumn 2024.
In 2025, consumer and investment demand will likely gradually cool down due to tight monetary conditions, which may result in a slowdown of annual inflation to 5.5% yoy by December 2025.
BALANCE OF PAYMENTS IN Q3 2024
According to the Bank of Russia’s preliminary assessment of the balance of payments, the current account balance in Q3 2024 amounted to $9.1 bn, this is around 40% less than the current account balance for Q3 2023 which was $15.5 bn and less than the current account balance for Q2 2024 which was $17.4 bn.
There is some deteriorating monthly intra-quarter dynamics:
- in July – $0.7 bn
- in August – $2.9 bn
- in September – $7.0 bn
The structure of the current account consists of three main balances:
- trade in goods
- trade in services
- and the balance of primary and secondary income
The balance of trade in goods amounted to $32 bn, which is 4% less ($1.4 bn in absolute value) than the value of Q3 2023 ($33.4 bn).
Growth in the value of imports of goods
from $75.7 bn in Q3 2023 to $76 bn in Q3 2024 (an increase of 0.4%) played a determining role in this small decrease, while the value of exports fell slightly more significantly from $109.1 bn in Q3 2023 to $108 bn in Q3 2024 (a decrease of 1%).
Such export dynamic is due to relatively stable prices for basic Russian export commodities (oil, gas, petroleum products, grain, and coal, ferrous and non-ferrous metals) and stabilization of redirected export flows from the EU and other “unfriendly” economies.
The observed dynamics of goods imports is likely due to the recovery of physical volumes of supplies because of reorientation to supplies from neutral countries and moderate fluctuations in world prices for imported goods. At the same time, it should be noted that the decrease in the index of the real ruble/US dollar exchange rate in January-September 2024 versus January-September 2023 amounted to 4.4%, which means a relative appreciation of import supplies.
The balance of trade in services
in Q3 2024 amounted to $13.4 bn, which in absolute value is 30% higher than the negative value of the balance of trade in services in Q3 2023 (-$10.3 bn). In contrast to trade in goods, there was an increase in both services exports (mainly transportation) from $9.7 bn in Q3 2023 to $10.3 bn in Q3 2024 (up 6%) and an increase in services imports (mainly travel) from $20.0 bn in Q3 2023 to $23.6 bn in Q3 2024 (up 18%).
The balance of primary and secondary incomes in Q3 2024
stood at $9.5 bn, which in absolute terms is 25% higher than the same figure in Q3 2023 ($7.6 bn).
Income receivable (capital income receipts from abroad) remained unchanged and amounted to $10bn, but income payable (withdrawal of income and repatriation of profits abroad, including payments to investors from neutral countries) increased by $1.9 bn (from $17.6 bn to $19.5 bn), which drove the deterioration in the balance of primary and secondary income.
The balance of the financial account of the balance of payments, excluding reserve assets, amounted to $15.0 bn, an increase of 5% compared with Q3 2023 ($14.3 bn). The balance of the financial account excluding reserve assets in Q3 2024 was formed mainly under the impact of growth of foreign assets.
The growth of foreign assets (excluding reserve assets) in Q3 2024 amounted to $12.5 bn, which is 1.8 times lower than in Q3 2023 ($22.5 bn). The delays in payments under international settlements on Russian exports triggered the increase in foreign assets.
Liabilities of all sectors of the Russian economy to non-residents in Q3 2024 decreased by $2.6 bn, while in Q3 2023 they increased by $8.2 bn. This is mainly due to payments to non-residents on previously declared dividends.
In Q3 2024, Russia’s external debt decreased by 2.8% to $293.4bn.
External debt of other sectors decreased to the greatest extent (by 6.5% in Q3 2024 to $160.9bn) on attracted loans, including within the framework of direct investment relations.
External liabilities of the public administration decreased in Q3 2024 by 4.0% to $31bn. External liabilities of the banking sector, on the contrary, increased by 4.1% in Q3 2024 to $101.5bn, mainly due to the accumulation of non-residents’ funds on accounts in Russian banks.
Reserve assets of the Russian Federation decreased in Q3 2024 by $3.2 bn ($2.3 bn in Q3 2023). This is mainly due to the sales of foreign currency within the framework of operations with the National Welfare Fund and “currency swap” operations aimed at smoothing volatility in the foreign exchange market.
Nevertheless, the positive revaluation of international reserves in Q3 2024 exceeded their decline on the back of operations presented in the balance of payments:
- The RF international reserves grew in Q3 by $40.2 bn to $633.7 bn (foreign exchange reserves rose by $15.0 bn to $434.0 bn, the value of monetary gold increased by $25.2 bn to $199.8 bn as a result of positive revaluation).
In Q3 2024 the volume of operations of the RF monetary authorities on net sale of foreign currency in the domestic foreign exchange market (which supports the ruble exchange rate) totaled Rb259.6 bn (Rb284.2 bn in Q2 2024).
Of these, the volume of foreign currency purchases within the framework of regular operations under the budget rule (in the amount of additional oil and gas revenues) in Q3 2024 equaled Rb321.3 bn1 (Rb417.3 bn in Q2 2024), while the volume of adjustments (regular transactions under the budget rule are adjusted on the balance of the following transactions: the difference between the amount of currency purchases deferred from August 10 through December 31, 2023, under the budget rule and the amount of NBF expenditures to finance the 2023 budget deficit outside the budget rule, and currency sales in the amount of net investment of NBF funds) to the volume of operations under the budget rule announced by the Russian Ministry of Finance in the form of foreign currency sales from the National Wealth Fund amounted to about Rb580.9 bn (Rb701.5 bn).
In H2 2024, the Bank of Russia carries out operations with foreign currency, adjusting the volume of operations announced by the Ministry of Finance of Russia by the amount of currency sales equaling about Rb1.8 trillion (Rb1.4 trillion is the difference between the volume of currency purchases deferred from August 10 to December 31, 2023 within the framework of the budget rule and the volume of expenditures of the National Wealth Fund to finance the budget deficit in 2023 outside the budget rule, Rb0.4 trillion, Rb0.4 trillion is the sale of foreign currency in the volume of net investment of the National Wealth Fund’s funds).
Ruble Weakened
In Q3 2024, the ruble weakened by 8.1% to Rb92.7 per USD, having returned to the level of the end of Q1 2024. This was due to the reduction in the current account balance shaped by the growth in the value of imports, as well as a stable deficit in the balance of primary and secondary incomes. In addition, the weakening of the ruble is associated with a drop in net sales of foreign currency by the largest exporters. Thus, net sales of foreign currency by the largest exporters declined from $42.7 bn in Q2 2024 to $32 bn in Q3 on the back of a change in the structure of export settlements in favor of ruble- denominated transactions.
In Q2 the ratio of net sales of foreign currency to foreign currency export earnings of the largest exporters reached peak values (109% on average) due to sales of foreign currency accumulated earlier for dividend payments. In Q3, the share of net sales in revenue declined slightly (to 83% in July 2024).