The year 2018 saw a number of challenges for the global economy: “trade wars”, eurosceptics strengthening their positions in the EU, collapse of the US stock market, increasing volatility in FX and commodity markets, change of monetary policy by the US Federal Reserve, and emerging market crisis. Global economic growth decelerated making up 3.7% compared to 3.8% in 2017. This was influenced by Chinese economy moderating from 6.8% in 2017 to 6.6% in 2018, as well as by shrinking GDP of other developing countries.
The US-China “trade war” dominated the headlines in 2018. Tariff war had a detrimental effect on the global demand. There were concerns of reduction in global growth and looming economic recession.
In early 2018, the market expected the US Fed to further tighten its monetary policy — aggressive interest rate hike and further reduction of asset balance sent Treasury bond yield to over 3.2% per annum. Over the past year, the US regulator raised the interest rate four times lifting it to a range of 2.25%–2.5% by the end the year. The S&P 500 demonstrated a confident growth until October, which was followed by a correction with the index losing around 20% from October to December. The US stock market crash was driven by growing concerns of approaching global economic recession, net liquidity outflow influenced by the wind down of quantitative easing programmes by key world central banks and the USD growth. The US central bank responded by reversing its monetary policy, putting the process of gradual interest rate rises to a halt and discussing revision of its balance sheet policy.
With euro rates remaining at zero per cent, the European Central Bank had wound down its QE stimulus programme by the end of the year. Brexit and anti-EU sentiments in the Eurozone triggered by growing popularity of eurosceptic parties added to the uncertainty over further ECB monetary policy.
Shrinking currency liquidity and worsening monetary environment in advanced countries exacerbated economic situation in emerging market economies — outflows of capital put national currencies under pressure, which triggered additional inflationary risks. Crises in Argentina and Turkey accelerated capital outflow from developing countries, which forced central banks to increase interest rates.
Just as in 2017, oil prices were largely influenced by OPEC+ production cut agreement. Exporting countries promptly reacted to the changing balance on the global oil market by reducing or ramping up production. At the same time oil prices were significantly impacted by geopolitical factors such as US sanctions against Iran, as well as production decrease in Libya and Venezuela resulting from internal conflicts. Brent reached USD/BBL 87 in October, but in the view of declining global risk appetite approached USD/BBL 50 by the end of the year.
In 2018, Russian economy was characterized by a moderate growth and continuing upward trends in the industry. The period from September to November witnessed a certain slowdown of growth momentum both in advanced and in developing economies due to changing trade relations, risks of export tariffs being imposed, as well as worsening economic expectations. Nevertheless, at the end of 2017 Russia’s annualized economic growth amounted to 2.3% compared to 1.5% in 2017.
After a decline in 2017 linked with the OPEC deal, oil production recovered by 1.7% in 2018 with mineral extraction increasing by a total of 4.1%. At the same time, processing and extractive industries demonstrated a 2.6% growth.
The average nominal wages stepped up from RUB 39,100 per month in 2017 to RUB 43,400 per month in 2018 with real disposable incomes growing by a negligible 0.3%.
Inflation in the first half of the year was hovering near historic lows, but it accelerated in Q3, reaching 4.3% y-o-y by the end of 2018. Low base of the previous year and devaluation of ruble put pressure on prices. Moreover, a planned VAT rise from 18% to 20% starting from 1 January 2019, increased expectations of inflation.
While in the first half of 2018 the Central Bank of the Russian Federation started gradually shifting from "moderately tough" to "neutral" monetary policy cutting key interest rate from 7.75% at the end of 2017 to 7.25% in June 2018, in the second half of the year the regulator toughened its policy. Crises on emerging markets, toughening of monetary policy by the US Fed and central banks of developing countries, coupled with growing inflation risks triggered by VAT hike in 2019, as well as weakening ruble forced the Bank of Russia to step up its fiscal policy in the second half of the year. The key rate was raised twice, at September and December sessions, to 7.75%.
US sanctions imposed on Russian companies and individuals in April 2018 contributed to reduction of foreign investment in Russian assets, which drove capital outflow in the financial account of the balance of payments and devaluation of ruble. However, this reduction was compensated by demand from local market participants, which maintained prices on federal loan obligations market. Additional US sanctions, imposed after the Salisbury incident, fuelled the next round of ruble devaluation. Overall loss of appetite to assets of developing countries added to the pressure suffered by the national currency.
Throughout this period, the Ministry of Finance of the Russian Federation played a significant role in the currency market. In order to make budget revenues less sensitive to oil price dynamics, the Ministry came up with a new fiscal rule, according to which the Bank of Russia, acting on behalf of the Ministry, was purchasing foreign currency in the amount of oil and gas budget revenues in excess of those corresponding to the base price of URALS oil at USD 40.8 per barrel. However, due to ruble confidently strengthening against dollar in August, the Central Bank suspended purchasing until the end of the year, which allowed to stabilize the situation. At the same time, the CBR transferred currency from its own reserves to the Finance Ministry, which resulted in shrinking surplus of ruble liquidity.
After an episode of significant volatility in August, first half of September situation on internal finance markets recovered. USD rate in 2018 ranged from RUB/USD 55.7 to 70.6, average URALS price made up USD/BBL 70.1. Due to rising oil prices, the MOEX Russia Index increased by 12.3%, while ruble depreciation drove RTS Index down by 7.4%.
In 2018, the Russian banking sector continued its stable growth while maintaining stability, which was evidenced by a revival in lending, particularly retail lending.
Banking sector assets saw a 10.4% increase, reaching RUB 94.1 tn compared with RUB 85.2 tn the year before, continuing the positive trend of FY 2017.
Lending in 2018 increased by impressive 12%; retail lending, despite weak population income dynamics, expanded by 22.4%, and corporate lending grew by 10.5% supported by acceleration of the economy, in particular, in the industry.
RAS net profit of Russian banks increased more than 60% to RUB 1.3 tn, up from RUB 0.8 tn in 2017. The growth of the banking sector’s profit was largely related to increase in assets.
According to the Bank of Russia, average interest rate on ruble-denominated loans to non-financial organizations with a maturity of more than one year, though declining by 8.45% by the middle of the year, accelerated reaching 9.17% at the end of 2018. Similar was the dynamics of short-term loans with average rate on loans with a maturity of up to one year decreasing from 9.43% to 9.2%.
Significant growth of retail lending was accompanied by improving quality of banks’ loan portfolios. The share of non-performing retail loans reached 5.1%, down from 7% in 2017 with overall NPLs declining both in relative and in absolute terms. The share of corporate NPLs remained at 6.3%.
St. Petersburg economy continued its growth in the reporting year: industrial production index went up by 5% (+5.5%, y-o-y) mostly due to various upward trends in the processing sector. In particular, apparel manufacture increased by 15.6%, chemical products by 9%, medicine and medical materials by 10.4%. Total turnover of the St. Petersburg enterprises climbed by 14.6% reaching RUB 13.4 tn. At the same time, wholesale turnover accounted for RUB 8.5 tn, an 11.3% increase from 2017. Retail turnover climbed up 2.3% in real terms.
In the reporting year, St. Petersburg banking sector assets grew by a modest 0.7%, making up RUB 2.23 tn as at 1 January 2019. The city's share in the Russian banking sector reduced from 2.6% to 2.4%. At the same time, lending boasted an increase of 5.6% for corporate loans and a remarkable 16% for retail loans in 2018.