Russia’s economy is off to a very weak start in the first quarter. Russian GDP growth slowed to 0.2% in May from a revised rate of 1.7% in the previous month, the Russian Economy Ministry said on June 21 and growth in the first quarter was a mere 0.5%.

The Russian central bank said in June it had lowered its 2019 GDP forecast to 1.0-1.5% from 1.2-1.7%, although analysts say growth will pick up in the second half of the year and should finish 2019 at around 1.5%.

The weak figures were reflected in weak industrial output results in May. After growing by a strong 4.7% y/y in April, manufacturing production fell by 1.0% y/y in May. While these figures were depressed by calendar effects, output also fell by 0.8% m/m in working-day and seasonally-adjusted terms. At the same time, mining production growth slowed as oil output was cut as part of Russia’s deal with OPEC.

Meanwhile, activity in the retail sector remained soft. After coming in at a two-year low of 1.2% y/y in April, retail sales growth only edged up to 1.4% y/y in May. And there was only a very small rise in construction output last month. Following a bleak Q1, when the economy expanded by just 0.5% y/y, it doesn’t appear that there has been much of a recovery in Q2.

The good news is that inflation eased, after rising to over 5% in the first quarter from record lows of around 2.3% last summer, it has started to fall again, and faster than anyone was expecting. Inflation eased from 5.2% y/y in April to 5.1% y/y in May, which was weaker than the Central Bank of Russia (CBR) had anticipated.

The Central Bank of Russia (CBR) already took advantage of the more benign climate to cut rates by 25bp in June to 7.5% which will help the growth story this year and analysts are widely expecting a second rate cut later this year.

Russia’s strong fundamentals and the fading sanctions fears allowed the state to get a fresh $2.5bn Eurobond away in a dual tranche with maturities of 3.9% and 4.3% respectively. Russia has all but fulfilled its borrowing programme on the international markets and has begun to slow its issues on the domestic market after a run of record large issues in the first quarter.

The stock market has soaed and was up by 30% YTD at the end of June, partly driven by a surprise double hike in Gazprom’s dividend that saw the stock soar by 40% in a matter of days. The Ministry of Finance has been insisting all state-owned enterprises (SOEs) pay 50% of their profits as dividends and now they almost all are. Those that have not reached 50% this year will do so next year.

Interestingly the hike in Gazprom’s dividend payments has lifted the average dividend yield for Russian stocks to 7.9% -- not only the highest in the world but also more than the Russian Ministry of Finance ruble-denominated OFZ treasury bills pay, which has dropped to below 8%. For the first time ever Russian equities are yielding more than stocks.

The RTS has broken out of its 900-1300 band where it has been stuck for the last five years, and while equity prices could continue the Russian market is and will remain massively undervalued for the time being.

Politically president Vladimir Putin held one of his marathon phone-ins in June. The talk was all about domestic issues – health, rubbish tips, incomes – and the take away was Putin is probably in his weakest position since taking office in 2000 as six years of stagnant incomes has irked the population who are at the same time becoming more politically sophisticated. The government has launched a RUB27 trillion investment programme called the national projects, but it will take at least another year until the beneficial effects of this spending are felt.

International the pressure on Russia seems to be coming off. In a notable concession, Russia was readmitted to the Parliamentary Assembly of the Council of Europe (PACE), the second set of sanctions that has been lifted, following the withdrawal of sanctions on aluminium producer RusAl earlier this year. Last year’s April round of sanctions, mostly on oligarch Oleg Deripaska and his Rusal aluminium producer, were withdrawn – the first sanctions to be dropped since 2014 – and at the end of June Russia was also readmitted to Parliamentary Assembly of the Council of Europe (PACE) – the second time some sanctions were dropped.

Clearly Europe wants to move away from sanctions, but the US government is still committed to them so the sanctions outlook remains confused.