What Jolted Russia’s Investments Is About to Fizzle Out; From pipelines to cash registers, the factors that caused last quarter’s pickup in investment are only temporary

(Bloomberg – bloomberg.com – Anna Andrianova – August 30, 2017)

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Russian investments have spiked to a five-year high as the economy exited recession, but the factors that drove the boom are already fading.

Fixed-capital investment accelerated an annual 6.3 percent in the second quarter, according to Bank of Russia estimates, the most since 2012. The jump was driven by two massive infrastructure projects, purchases of equipment fueled by a stronger ruble, as well as a law pushing retailers to invest in new cash registers – all of which are temporary.

“Companies were actively buying machine-building equipment, including ones made abroad, on the back of the ruble’s strengthening at the start of the year,” the central bank said in its monthly report, highlighting the short-term nature of the boost. Construction also grew, supported by large projects including the bridge to Crimea and the Power of Siberia gas pipeline, it said.

Gazprom’s new pipeline will supply about $400 billion worth of natural gas to China within 30 years, according to estimates from President Vladimir Putin when Russia and China signed the deal in 2014. Meanwhile, the 12-mile bridge across the Kerch Strait in the Black Sea will be the longest in Russia and solidify its link to Crimea following its annexation more than three years ago.

Russia’s economy is emerging from its longest recession this century, prompted by a drop in oil prices and international sanctions imposed after the Crimea annexation weakened the ruble and sparked capital outflows. Amid the bleaker business environment, investment came to a halt, posting a three-year contraction.

Now the economy is enjoying a rebound and may even exceed the official full-year forecast of 2 percent. The Bank of Russia said may also raise its 2017 growth projection, while lifting investment forecast to 4-5 percent for the third quarter.

“When an economy comes out of recession, investment growth tends to pick up sharply as firms make postponed investments, but then growth in investment slows once this impact fades,” said William Jackson, an analyst at London-based Capital Economics. “I don’t think the kind of growth rates we’re seeing now will be sustainable.

And while a new online trade law implemented from July 1 that forced retailers to fit new registers helped get the tills ringing last quarter, Alfa-Bank analysts Natalia Orlova and Valeriya Volgareva say the effect has also passed.

“This growth factor is no longer relevant for the second half of 2017 and, thus, may cause a weakness in investment growth in the coming quarters.”

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