MANAGEMENT REPORTMANAGEMENT REPORT
RUSSIAN ECONOMY AND BANKING
SECTORUnless otherwise stated, the source of macroeconomic data is the Federal State Statistics Service.
RUSSIAN MACROECONOMIC INDICATORS,
Russia’s GDP contracted by 3.0% in 2020. As a result of harsh restrictive measures adopted in 2Q 2020, economic output declined by 7.8%, with retail and wholesale trade, manufacturing, transportation and the services sector contributing the most to the decline.
In the second half of the year, the economy recovered on the back of manufacturing and retail trade (consumer demand), while the mining, transportation and services sectors continued their downturn.
The economic recovery was driven largely by an increase in federal budget spending, primarily social spending, which boosted public sector wages in particular. The growth of real wages amounted to 2.5% in 2020.
As in 2018–2019, the Russian Finance Ministry’s budget rule had an impact on the structure of economic growthAccording to the budget rule, the Ministry of Finance of the Russian Federation uses all oil and gas revenues from oil prices above the baseline set in the budget of the Russian Federation to purchase foreign currency for the National Wealth Fund.: the decrease in oil prices and the loss of tax revenues from the oil and gas sector did not lead to a decrease in budgetary spending. In addition, the government was granted the right to increase budgetary spending by RUB 1.8 trillion without amending the Budget Code, thereby exceeding the maximum spending limit established by the budget rule.
As a result, the structure of GDP in terms of consumption in 2020 looked as follows: household consumption decreased by 8.6% (the drop was 21.7% in 2Q, which caused a decrease for the year as a whole), government spending increased by 4.0%, gross fixed capital formation (investment) decreased by 4.3%, and exports and imports decreased by 4.3% and 12.0%, respectively.
The purchase and sale of foreign currency, as stipulated by the budget rule, along with the actions taken by the Bank of Russia helped stabilise the rouble exchange rate, in particular when oil prices were especially low and volatile (in March and April). During the year, the rouble saw real depreciation of 7.5% against foreign currencies (the nominal rouble exchange rate decreased by 10.0% against the dollar and 11.6% against the euro).
Consumer inflation accelerated to 4.9% in December 2020 amid the weakening rouble and due to insufficient supplies in certain food markets (in particular sugar, fruits and vegetables, and sunflower oil) and higher global food prices (grain and soybeans).
Fearing considerably lower inflation than expected amid restrictions and weak consumer demand, the Bank of Russia lowered its key rate from 6.25% in early 2020 to 4.25% in July 2020; in the wake of a rise in inflation above forecasts, however, the Bank of Russia changed its rhetoric, signalling that it would determine the timing and pace of a return to a neutral monetary policy.
Restrictions related to the spread of COVID-19 had a negative impact on economic growth in 2020. However, state support measures for the worst-affected sectors of the economy and relief for banks from the regulator allowed the banking sector to end what was a difficult year in decent shape.
As of the end of 2020, the banking system’s net assets had increased by 16.9% (compared with 3.0% in 2019) on the back of an expanded loan portfolio and a decrease in the value of the rouble against the US dollar. At the same time, the penetration of services, defined as the ratio of banks’ total assets to GDP, increased to 99%, up from 81% a year earlier.
The growth of the corporate loan portfolio was driven by state support measures for affected industries, the economic recovery in the second half of the year, a further decrease in interest rates on loans alongside the reduction in the Bank of Russia’s key rate and the currency revaluation of the portfolio. As a result, loans to corporate entities increased by 14.3% during the year (or by 9.8% excluding the effect of currency revaluation), compared with an increase of 2.3% a year earlier (or 5.3% excluding the effect of currency revaluation).
The state-run preferential mortgage programme and the lower rates offered by bank-run mortgage programmes were the main sources of growth in the retail portfolio. The mortgage portfolio increased by 21.2% in 2020, up from 16.8% in 2019. The increase in consumer lending slowed on the back of lower demand, amounting to 7.9% over the year, compared with 19.7% growth a year earlier.
As of the end of 2020, the share of overdue loans in the corporate portfolio remained at the same level of the previous year, at 7.8%, while the share of overdue loans in the retail segment increased by 32 b.p. to 4.7% amid the worsening macroeconomic situation.
In 2020, the increase in individual deposits accelerated to 11.3% (7.3% in the previous period); however, excluding the effect of currency revaluation, the increase was only 7.7% (9.9% in 2019) as a result of the outflow of cash into investment products due to lower deposit rates and a decrease in household income. Corporate account balances increased by 19.6%, up from 1.2% in 2019 (growth accelerated from 4.6% to 13.7% excluding the effect of currency revaluation). Banking sector debt to the Bank of Russia increased by 46.8%; however, the share of banking sector debt of gross assets changed slightly despite the challenging conditions (2.8% at the end of 2019 compared with 4.0% at the end of 2020).
Banks earned a net profit of RUB 1.6 trillion in 2020, down 6.6% from 2019, while profit before tax amounted to RUB 2.0 trillion, down 3.1% from the year before. The return on equity before taxes was 19%, compared with 22% in the previous period, and the number of unprofitable banks increased by seven to a total of 75 at the end of 2020.