Despite the sanctions, Russia’s economy grows at a steady rate.

According to Eurasian Development Bank, Russia’s GDP will demonstrate a gain of 1.4 percent in 2017. In August 2017, the Eurasian Development Bank (EDB) has published its new macroeconomic review called “The Eurasian Transmission: From Integration to Growth.” The analysis provided in the forecast is optimistic in that it shows an overall growth rate of 1.6 percent for all the countries of the former U.S.S.R., a figure that is 0.3 percentage points higher than the number listed in the organization’s previous market prognosis.

EDB’s report started out by observing that Russia’s economy continued its recovery in 2017, with GDP growth in the first quarter of 2017 registered at 0.5 percent year-on-year (0.3 percent in the quarter before). EBD noted that the positive trend was catalyzed by increasing exports and the domestic demand, which were boosted by recovering consumer sales. Import increases constrained recovery growth due to the strengthening of the Russian currency.

The Eurasian Development Bank further noted that growth in the economy intensified in the second quarter of 2017 from 1.4 percent in April to 3.1 percent in May, primarily due to good domestic demand. GDP growth in June 2017 stood at 2.9 percent year-on-year. While consumer activity is at moderate levels, sustainable recovery is in sight. The bank’s analysis highlighted increases in salaries starting from February 2017, as well as declining unemployment figures. These factors yielded positive retail turnover for the first time since 2014. In April, retail turnover rose 0.1 percent year-on-year and in May, it increased 0.7 percent year-on-year. Strong company solvency and heightened investment activity improved against the backdrop of exchange rate dynamics that were conducive to increased imports.

Industrial production rose in the time period from April to May 2017 almost in all sectors of the economy. Industrial production growth rate in May was registered at 5.3 percent relative to May 2016, which the EDB characterized as the highest indicator in recent years. Output volumes rose by 1.7 percent in the five-month period from January to May 2017 compared to the corresponding period of the previous year.

The EDB saw evidence of Russia’s economic activity growth in freight turnover volumes, which attained their highest value in the last six years. In particular, May 2017 growth rate was 9.5 percent versus May 2016 numbers.

According to EDB, modest consumer demand, coupled with a positive exchange rate trend and decreased inflationary expectations, led to inflation’s stabilizing in April and May 2017 at 4.1 percent. The bank recognized that food inflation due to weather anomalies in the spring months spiked up in May, and was even more acute in June, fueling overall inflation growth to 4.4 percent. While recognizing the strengths of the Russian economy, the bank nonetheless is conscious of the risk factors that may lead to greater inflation, such as the ruble’s possible weakening in the event global commodity markets become more volatile. The EDB’s forecast indicates that the Russian Central Bank’s moderately tight monetary policy will likely lead to inflationary processes.

With regard to exchange rate tendencies in the second quarter of 2017, the EDB noted that the trends in Russia were mixed. From April to May 2017, the exchange rate received a boost from foreign investors’ interest in Russian financial assets and the Russian exporters’ forex revenue.

The exchange rate slipped downward slightly at the end of the first half of the year, once oil prices declined to their lowest levels this year. The decline in the exchange rate was also associated with the decrease in interest rates set by Russia’s Central Bank and the U.S. Federal Reserve.

EDB’s report stated that Russia’s current account balance was USD27 billion from January to May 2017, adding that this year’s figure demonstrated a significant improvement over last year’s current account balance of USD16.1 billion.

The Eurasian Development Bank estimated that the Russian ruble exchange rate in the second quarter of 2017 was above its equilibrium trajectory, and the real effective exchange rate gap was measured at 5.5 percent. The EDB’s analysis showed that market conditions favor a moderate weakening in the ruble’s value.

The EDB’s review indicated that the net outflow of capital in the private sector decelerated after the first quarter of 2017 as a consequences of banking sector transactions. May’s figure for net outflow of capital by the private sector was USD1.4 billion, which is the lowest level this year. Capital outflows stood at USD15.4 billion in the first quarter of 2017.

According to EDB, the extra income accumulated as a result of the oil prices’ exceeding those built into the budget resulted in diminishing federal budgetary deficit. As a consequence, full-year deficit estimates have now been lowered from 3.2 percent of the GDP to 2.1 percent. From January to May 2017, Russia registered a budgetary deficit of RUB564 billion, or 1.7 percent of the GDP. The country’s most recent budgetary legislation revised the oil price outlook from USD40 to USD45.6. These adjustments will bring in an extra RUB1.19 trillion in revenue.

In February 2017, Russia’s Ministry of Finance began currency purchases in the domestic market, which continued at an intense pace up to the end of the second quarter. Total funds earmarked for foreign currency purchases declined from RUB131.1 billion in February to RUB74.3 million in June. The amount of surplus oil and gas revenues earmarked for currency acquisition is estimated at RUB623 billion (USD10.57 billion) for 2017.

The EDB noted that Russia is currently pursuing a domestic borrowing program. As a result, domestic public debt increased from April to May by RUB0.17 trillion (USD2.88 billion), leveling off at RUB8.48 trillion (USD14 billion) in June. Foreign public debt in June was USD48.5 billion, which is USD2 billion less than the figure reported in April and May. The reduction in debt is a result of a forex bond redemption.

The Eurasian Development Bank made upward revisions to its economic growth forecast for Russia in 2017 as a result of the country’s resilient economic recovery. The EDB now projects GDP growth in 2017 to total 1.4 percent. The estimate for GDP growth in 2019 is 1.7 percent. In the Bank’s assessment it will primarily be the domestic factors that will be the drivers of growth in the medium term. Foreign trade is not anticipated to make considerable contribution to the county’s economic growth. Recovery in consumer activity and investments will strengthen as a result of monetary easing.

The EDB forecasts that the lower inflationary expectations will persist with a moderately tight monetary policy. The Central Bank’s target inflation is expected at 3.9 percent in 2017 and four percent in 2018 and 2019. With decelerating inflation, the Central Bank is expected to continually reduce its key rate, providing additional impetus for lending and economic recovery.