The Russian economy continues to exceed expectations

Even in normal times, the Russian economy is as transparent as a Siberian blizzard. And these are not normal times. Since the Russian invasion of Ukraine, the Central Bank of Russia (CBR) and Rosstat, the national statistical institute, have stopped publishing data on everything from trade to investment. Many question the reliability of the data they keep on
to emerge. Investment banks, which no longer provide advice on Russian companies to their clients, have downsized their research activities. Multilateral organizations have withdrawn economists from the country.

In the blizzard, a furious debate broke out on the state of the Russian economy. A recent article by five Yale University researchers argues that the withdrawal of Western companies, coupled with sanctions, is paralyzing it. The signs of well-being are only illusions. “The statistics selected by Putin are being heralded in the media and used by well-meaning but superficial experts to construct predictions that are overly and unrealistically favorable to the Kremlin,” the researchers argue. Others are less pessimistic. “The economy is not collapsing,” wrote Chris Weafer, a respected Russian observer, in a recent article. But where is the truth?

Towards the recession
After Russia invaded Ukraine, its economy is in free fall. The ruble has lost over a quarter of its value against the dollar. The stock market collapsed, forcing supervisory authorities to suspend transactions. While their governments were imposing sanctions, hundreds of Western companies left Russia or promised to do so. Within a month, analysts had revised down their forecasts for Russian GDP in 2022 from a 2.5 percent growth to a drop of nearly 10 percent. Some have been even more catastrophic. “Experts predict that Russia’s GDP will collapse by 15 percent in 2022, wiping out the last fifteen years of economic growth,” the White House said. Everyone agrees that the country is still suffering. Massive interest rate hikes in the spring, designed to stabilize the collapse of the ruble, coupled with the withdrawal of foreign companies, pushed the country into recession.

According to official data, in the second quarter, GDP fell by 4 percent on an annual basis. Many of the three hundred Russian cities that rely on a single industrial sector, hit by the sanctions, are in full recession. Many people, especially among the more educated, have fled, while others are moving their resources out of the country. In the first quarter of 2022, according to the latest available data, foreigners took direct investments worth 15 billion dollars away from the country, most likely the worst ever recorded. In May 2022, the dollar value of Russian remittances in Georgia was strangely ten times higher than the previous year.

Better than expected
But an analysis by The Economist, based on a wide range of sources, suggests that the Russian economy is doing better than predicted by even the most optimistic estimates, as hydrocarbon sales fueled a record current account surplus. Take for example Goldman Sachs’ current activity indicator, a real-time measure of economic growth. In March and April this index declined dramatically, perhaps on a scale comparable to that of the global financial crisis of 2007-2009 or the invasion of Ukraine in 2014. But it recovered in the following months. Other indicators also suggest a recession, but not deep, at least by Russian standards. According to JPMorgan Chase, industrial production fell by 1.8 percent in June compared to the previous year.

A tertiary sector growth index, compiled by sending questionnaires to managers, reveals a smaller decline than in previous crises. Electricity consumption, after an initial decline, seems to be growing again. The number of rail freight, an indicator of the demand for freight, is holding up. Meanwhile, inflation is falling. From the beginning of 2022 to the end of May, consumer prices increased by around 10 percent. The devaluation of the ruble made imports more expensive and the withdrawal of Western companies reduced supply. But according to Rosstat, prices are now falling. An independent source, published by the consultancy State street global markets and the data firm PriceStats, shows similar trends derived from online prices. CBR says it is more concerned about the collapse of prices than inflation.

The appreciation of the ruble has reduced the cost of imports and expectations for Russian inflation have declined. Data from the Cleveland Federal Reserve, consultancy firm Morning consult and Raphael Schoenle of the University of Brandeis show that inflation forecast for next year has fallen from 17.6 percent in March to 11 percent in March. July. Furthermore, given its abundance of gas, Russia is unlikely to experience a surge in energy-related inflation like that experienced by European countries.

Falling prices are not the only factor helping families. True, the unemployment rate, which fell to an all-time low of 3.9 percent in June, is misleading. Many companies have put staff on leave, often without pay, to avoid recording layoffs. But there isn’t much evidence of an occupation collapse. Data taken from HeadHunter, a Russian job supply and demand site, indicates that the ratio of job seekers to job vacancies across all sectors of the economy increased from 3.8 in January to 5.9 in May (making it more difficult to find a job than before), and then return to decline a bit.

Figures from Sberbank, the largest Russian lender, indicate that average real wages have risen sharply since the spring. Partly because the job market is holding up, people can keep spending. Sberbank data indicates that real consumer spending was virtually unchanged in July compared to the beginning of the year. Imports fell in the spring, not least because many Western companies stopped
provide them. However, the decline was not severe by the standards of the most recent recessions, and imports are now rapidly picking up.

Three factors explain why Russia continues to beat forecasts. The first is the policies. Vladimir Putin doesn’t know much about economics, but he is happy to delegate management to those who understand. CBR is full of overqualified nerds who intervened promptly to prevent an economic collapse. The
doubling of interest rates in February, combined with capital controls, supported the ruble, helping to reduce inflation. The general public knows that Elvira Nabiullina, the central bank governor, is determined to keep prices at bay, even if that doesn’t make her a popular figure.

The second factor has to do with recent economic history. According to the Washington Post, Russian defense minister Sergei Shoigu warned the British government in February that the Russians “know how to suffer like no other”. This is the fifth economic crisis the country has been facing in 25 years, following those of 1998, 2008, 2014 and 2020. Anyone over 40 remembers the economic chaos caused by the fall of the Soviet Union. People have learned to adapt rather than panic (or rebel). Some parts of the Russian economy have long been quite disconnected from the West. This has reduced their growth, but has made the recent intensification of isolation less painful. In 2019, foreign direct investment in the country was worth around 30 percent of GDP, compared to a global average of 49 percent. Before the invasion, only 0.3 percent of Russians with jobs were employed by a US company, compared with more than 2 percent in rich countries. Russia also needs relatively few raw materials from abroad. So the further isolation hasn’t had a big impact on the data so far.

The third factor concerns hydrocarbons. The sanctions have had limited impact on Russian oil production, according to a recent report from the International Energy Agency. Since the invasion, Russia has sold fossil fuels worth approximately $ 85 billion to the European Union. How the foreign currency accumulated in this way is spent is a mystery, given the sanctions against the government. But there is no doubt that these resources are helping Russia to continue financing imports, as well as paying for soldiers and buying weapons.

As long as Putin is in power, Western investors will be reluctant to touch Russia. The sanctions will remain. CBR admits that while Russia is not very dependent on resource imports, it is in dire need of foreign machinery. Over time, the burden of sanctions will be felt and the country will produce worse quality goods at a higher cost. But for now its economy drags on.

(Translation by Francesco De Lellis)