Russia’s GDP expanded by 1.8% in the second quarter, a bit weaker than analysts were expecting but up from 1.3% in the first quarter and continuing in the right direction, economists said on August 12.

Official forecasts for the whole year put growth on the order of 2% with some economists previously predicting even faster growth. However, the second quarter result suggests the year’s growth will come in under that target, and that the slower growth is caused by an increase in the VAT rate in July from 18% to 20% and new sanctions that may be imposed by the US in the autumn. Both these factors mean the Central Bank of Russia (CBR) is also unlikely to cut rates again, or at least slow its cutting cycle even further, that will also depress growth.

"This year, we anticipate a 1.8-2% GDP growth," Russian First Deputy Prime Minister and Minister of Finance Anton Siluanov said on August 13, adding that the second quarter of 2018 demonstrated economic growth dynamics of 1.8%, with upwards dynamics to grow further in the following years.

Capital Economics was one of the more optimistic forecasters and was predicting 2.3% growth this year. Its analysts still think there are chances for upside surprises on the back of recovering consumption. 

“We think there’s a good chance that these data will be revised up. And, more importantly, we still think the conditions are in place for the recovery to strengthen in the next few quarters,” Capital Economics said in a note.

The Bloomberg consensus forecast was for 1.8% y/y growth and 0.6% q/q growth, according to Rosstat, which hasn’t published a breakdown of the national accounts figures yet.

Monthly activity data suggests that weakness in the agricultural sector was more than offset by faster growth in industrial production, retail spending and construction. However, industrial production has been disappointing, slowing in the last three months — a result mirrored by the slowdown in the manufacturing PMI. Still, the services PMI has continued to expand and that, together with the results of the Watcom Shopping index, suggests that the structure of the Russian economy is changing towards a more service-orientated economy.

Russia’s economy is doing fairly well but what is holding it back from faster growth is a crisis of confidence among businesses. Corruption and red tape are problems, but the predatory nature of the state-owned enterprises is a bigger one.

“On the expenditure side, lower inflation and labour market improvements should boost consumer spending. And on the production side, we think that the economy will be boosted by an increase in oil output,” Capital Economics said in a note.