Russia's Unpredictable Past Is Complicating Economy's Future

(Bloomberg) -- Russia is a country with an unpredictable past, according to a local saying, and a recent change in some of its economic data rather proves it.

A revision by the statistics service this month instantly turned factory output from the laggard of Russia’s recovery into one of its few bright spots. The data review more than doubled last year’s gain in industrial production from its previous estimate, suggesting to Alfa-Bank “a completely new reality of the Russian growth story.”

Far from decelerating, it turns out, a quarter of the economy was actually on the ascendant, thanks to a shift by the Federal Statistics Service to a new classification and additional data supplied by companies. While that implies a better momentum going into this year, it’s heaping uncertainty for investors and analysts trying to take the pulse of an economy already rattled by U.S. sanctions, changes in the tax system and the dimming outlook for oil prices.

“It seems the aim of the entire revision was to improve the figures ever so slightly,” said Oleg Popov, a money manager who oversees $300 million of assets at April Capital in Moscow. But “the changes are quite substantial, and in the West they would have caused a shock.”

Revisions going back as far as 2016 have already prompted the Economy Ministry to raise its assessment of growth in gross domestic product by 0.3 percentage point for 2017 and by 0.2 percentage point for last quarter. Next week, the statistics service is due to issue its final estimate of the first-quarter GDP performance, which it just reaffirmed at 1.3 percent from a year earlier.

For April Capital’s Popov, the shift in control over the agency back to the Economy Ministry gives pause. It took over the statistics service, which previously reported directly to the cabinet, after criticizing the quality of data being produced. That’s created the impression of a conflict of interest because the ministry is also responsible for official forecasts, which were proving to be too optimistic -- until the data revision.

Meanwhile, the weak performance has been a political problem for President Vladimir Putin, who’s pledged after his re-election in March to accelerate sluggish growth to a level that exceeds the global average in order to lift Russia into the world’s top five economies and deliver a “decisive breakthrough” in living standards.

The statistics service explained the revised figures by saying that it’s trying to improve the quality of data but often finds that producers are overly pessimistic in their initial estimates and wind up revising them higher in later reports.

After the changes, which largely affected manufacturing, last year’s expansion in industrial output was upgraded to 2.1 percent from 1 percent and the gain in the first quarter now stands at 2.8 percent, up from 1.9 percent.

What Our Economists Say...

“These revisions are encouraging but also worrying. Big leaps forward in data quality can also mean poor comparability with the past, a problem that mars many Russian series.”
--Scott Johnson, Bloomberg Economics

Although many analysts were taken aback by the revision, the changes closer align figures for factory output with other indicators, according to JPMorgan Chase & Co. and VTB Capital. Goldman Sachs Group Inc. also sees “greater credibility in the revised estimates” as its own activity indicator showed higher growth than suggested by the previous data.

What’s more, JPMorgan estimates the result may completely erase an economic contraction of 0.2 percent for 2016. That’s after a new calculation method, which gave more weight to military programs, already improved an initial reading.

“Stronger GDP growth from the second half of 2016 looks more consistent with business surveys and labor-market developments since then and also implies somewhat stronger trend-growth estimates,” said Anatoliy Shal, analyst at JPMorgan in Moscow.

At the same time, Alfa-Bank has warned that the revision for 2017 also creates a “negative base effect for growth” in the second half of this year.

“Past performance does not necessarily indicate a promising outlook,” Alfa-Bank analysts Natalia Orlova and Valeria Volgareva said in a report. “The statistics revision adds additional confusion to market sentiment.”

©2018 Bloomberg L.P.

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