Russia’s investment flop shows flawed recovery

For an economy safely out of recession, the tidings on investment in Russia are increasingly grim.

As a broader recovery gathers pace, capital spending by companies is off to a poor start in 2017 after contracting in the past three years. A close proxy for investment—the value of construction works completed—shrank for a fourth month in March in the biggest decline this year, according to data published last week.

The setback contrasts with the confidence expressed by the central bank that the “lengthy investment pause” is already over.

Fixed-capital investment rose 1 percent in the first quarter from a year earlier, according to the median of nine estimates in a Bloomberg survey. The statistics service, which in 2016 started releasing only quarterly investment figures, is due to publish the data for January to March next month.

“Despite a considerable reduction in uncertainty, investment growth is constrained by a set of factors,” said Dmitry Kulikov, a senior analyst at Russian rating company Acra.

These include “a relatively higher level of risk perception after the recession, accumulated delinquencies in bank credit, and a weaker ruble than in the precrisis period.” Once a central plank of government efforts for exiting the crisis, investment has stalled as the economy remains hamstrung by corruption, weak institutions and a poor business climate.  Russia’s property rights and the prevalence of foreign ownership were rated below the 120th spot among 138 nations in the World Economic Forum’s Global Competitiveness Report.

Finding the results lacking, President Vladimir Putin last week asked for additional measures to encourage investment. Days later, Prime Minister Dmitry Medvedev said his Cabinet is discussing tax breaks for companies planning to increase capital expenditure.

The Economy Ministry has also proposed a program of subsidizing rates on long-term loans, which could be issued through state development lender Vnesheconombank, according to the Vedomosti newspaper.

‘Significant acceleration’

“Government attention has finally shifted to an investment and modernization agenda,” said Vladimir Tikhomirov, chief economist at BCS Financial Group, a Moscow brokerage. “This is clearly a positive and long-overdue development, which, if successful, could lead to significant acceleration in Russia’s growth rates.”

Judging by the performance of construction so far this year, companies could use more help.

Volumes in the industry, which accounts for about 40 percent in total capital spending, were down 4.3 percent last quarter, “flagging a negative quarterly print for fixed-capital investments,” said Dmitry Polevoy, an economist at ING Groep NV in Moscow.

“Investments are still checked by the expectations of the decline of the borrowing rates in the quarters ahead and uncertainty over the configuration of the tax system,” VTB Capital analysts, including Alexander Isakov, said in a report.

Although the central bank has maintained its “moderately tight” policy, the cost of credit in Russia continues to decline. The average rate on corporate ruble loans for up to 12 months was at 11.48 percent in February, compared with more than 13 percent a year earlier and a high of almost 20 percent in January 2015.

Rate outlook

The central bank will lower the key rate with another quarter-point reduction at its meeting on Friday, according to most of the 32 economists surveyed by Bloomberg. In March it ended a six-month pause, reducing the benchmark from 10 percent to 9.75 percent.

Bank of Russia Governor Elvira Nabiullina has already said a “discussion may be held on lowering the rate by between 25 and 50 basis points.” After a “ generally weak” snapshot of the economy in March’s data, the chance of deeper monetary easing is growing, according to Bank of America (BofA) Corp.

“The pace of improvement is disappointing, which could put pressure on the central bank to deliver more aggressive policy easing” this week, said Vladimir Osakovskiy, an economist at BofA in Moscow. “We believe this could increase the possibility of a greater than 50 basis-point rate cut.”

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