The Russian equity market ended in the black last week. The performance was mainly driven by the 3.1% rise in the price of Brent crude oil in US dollar terms. Oil prices were supported by the outcome of the OPEC+ meeting at which the member countries decided to deepen and extend the output cut deal (see next page for more details).
Energy sector companies outperformed, thanks to rising oil prices. The growth of the energy index was mainly driven by Lukoil, the ordinary shares of Tatneft and stock of Rosneft. They rose by 7.6%, 8.9% and 3.8, respectively, in rouble terms.
The consumer sector index underperformed other sectoral indices. This was mainly due X5 Retail Group, Lenta and M.Video, whose share prices fell by 5.2%, 7.3% and 4.4%, respectively, in rouble terms. X5 Retail Group and M.Video corrected after strong gains in the previous week. Meanwhile, Lenta fell on the news that the company’s CEO had unexpectedly stepped down after heading the company for almost 10 years.
OPEC+ group members decided to cut an additional 1.2 million barrels per day (mbpd) from production levels as of October 2019. On fears of excess supply in the global market, the price of Brent crude has fallen by 30% in US dollar terms since October. The OPEC+ member countries should start to cut their output from the beginning of January 2019. They agreed to reduce output by 0.8 mbpd, while independent oil-producing countries would cut another 0.4 mbpd. Among the 10 non-OPEC members taking part in the deal, Russia is likely to contribute a cut of 0.228 mbpd. The agreement would last for six months up to June 2019, with a review set for April 2019.
Inflation in Russia accelerated to 3.8% YoY in November from 3.5% YoY in October. Food inflation was the main driver, rising by 3.5% YoY compared to an increase by 2.7% YoY in October. Within the category, the major price changes were for sugar and harvest products. Sugar prices surged by 23.4% YoY, while in the previous month it rose by 10.6% YoY. Inflation of fruit and vegetables prices accelerated to 0.8% YoY after contracting by 0.5 YoY in October. Overall, inflation remained close to the Central Bank of Russia’s long-term target of 4%, while the regulator forecast it should be within the range of 3.8%-4.2% by the end of the year.
The World Bank released a report on the Russian economy and the measures that could be taken to preserve stability, double pace of economic growth and reduce poverty by half. These are Vladimir Putin’s requirements, which he announced in his “May orders” this year. The World Bank wrote that Russia’s GDP will likely grow by 1.5%-1.8% on average each year over 2018-2020. By 2023, it could slow to 1.3% mainly due to unfavourable demographics: the UN forecasts Russia’s working-age population to hit its lowest point in 2020. To double economic growth by 2028, Russia would need to increase the inflow of migrants, to expand the contribution of investment to GDP to 34% from the current 23% and to gradually accelerate its total factor productivity. However, Russia could be able to halve poverty to 6.6% by 2024 from 13.2% as of the end of 2017 even with the current pace of economic growth. To achieve this, the government needs to redistribute the delivery of social aid and transfers, as only 20% of the allocated budget currently reaches its intended beneficiaries.
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RusHydro is due to publish its IFRS results for Q3 2018.
The Central Bank of Russia will hold a monetary policy meeting on Friday.