Although the Russian economy has withstood a series of Western sanctions, experts say it is difficult for the country’s economy to return to pre-conflict levels.
According to the company Archyde.comRussia’s economy following a year of conflict in Ukraine has proved surprisingly resilient in the face of a barrage of Western sanctions.
But the road to Moscow’s return to pre-conflict prosperity may be a long way off, given that most government spending goes to defense.
There are positive signals
Immediately following Russian President Vladimir Putin launched a special military operation into Ukraine in February last year, many internal forecasts suggested that the Russian economy will shrink by regarding 10% in 2022, far exceeding the recession rate. recession following the collapse of the Soviet Union and the financial crisis of 1998. However, according to Russian National Statistics Service (Rosstat) data, Russia’s gross domestic product (GDP) shrank only 2.1% in last.
“Russia’s economy and governance system has proven to be much stronger than the West thought. Their calculations did not come true,” Putin affirmed in a speech to the Russian parliament on February 21.
Part of Russia’s economic picture is brighter thanks to the fact that the price of Russian energy exports is still quite high, which helps Russia to mitigate the impact of Western sanctions to isolate the country economically. Meanwhile, capital controls pushed the ruble to a seven-year high. In addition, falling imports have also led to a record current account surplus.
Russia’s central bank, under Governor Elvira Nabiullina’s leadership, remains “steadfast” in the face of a “storm” of sanctions from the West, despite losing access to its huge international reserves of regarding 300 dollars. billion USD.
But it’s hard to get back to pre-conflict levels
Still, analysts say Russia has lost a significant and long-term opportunity cost due to the Russo-Ukrainian conflict. Before the outbreak of hostilities, Russia predicted its economic growth in 2022 to be 3%.
Analyst Grigory Zhirnov of the My Investments Telegram channel said Russia’s rather unexpected economic growth in 2022 is a positive sign, but he thinks it is better to compare the current relative dynamics with what can be achieved if the pre-conflict economic development trend continues.
He also forecast that the Russian economy might return to the size of 2021 by 2025 and that GDP is unlikely to reach pre-conflict levels within the next 10 years.
Russian oil is the economic sector most pressured by Western sanctions. Photo: Sergei Karpukhin/REUTERS
Looking for a solution
Under the pressure of Western sanctions on Russian oil, the country’s main economic sector, Russia is trying to find new markets in Asia, while maintaining the supply of consumer goods through a plan to import goods. gray aperture. However, Russia’s tendency to increasingly decouple from Western markets, once the engine of growth, will make its economy more inward.
President Putin affirmed that efforts to “de-dollarize” have helped the ruble double its market share in international payments. Russian banks are also looking for domestic tools to recover profits.
Mr. Putin also urged the business elite to invest more in Russia because the Russian people do not sympathize with the blockade of their yachts and villas abroad.
In addition, the Russian President began to debate the sustainable development of the country and a self-sufficient economy.
The road ahead is still bumpy?
However, the fact that Russia is increasing military spending is likely to hinder the development of the civilian economic infrastructure in the country, according to the report. Archyde.com. Rising spending and falling revenue led to a budget deficit of $25 billion in January 2023, while the current account surplus more than halved from a year earlier.
High oil prices would normally finance the Russian National Wealth Fund (NWF) but with hydrocarbon exports under embargo and Western price ceilings, Russia is having to sell the Chinese yuan from the NWF. to make up the shortfall.
Although the Russian Ministry of Finance is committed to not letting the budget deficit get out of control, the use of financial reserves from the NWF risks reducing Russia’s future spending capacity and poses risks. inflationary.
Falling incomes have led Russians to save more and spend less. Photo: Konstantin Zavrazhin/GETTY IMAGES
Russia’s central bank is more pessimistic regarding the health of the country’s economy, has warned that a growing budget deficit might lead to inflation, and said it is likely to raise interest rates. rate, currently at 7.5%, this year rather than cut.
Veteran economic official Oleg Vyugin also said that this year’s oil and gas revenue target is difficult to achieve, especially when the difference between the international benchmark Brent crude oil price and the Russian Urals oil price widens.
To meet budget plans, Russia will likely have to double NWF’s planned spending. This risks pushing up inflation and forcing the Central Bank to increase borrowing costs.
“The adoption of such a budget is the path to the gradual erosion of financial stability and the reduction of people’s real wages,” Vyugin said in a report released this month.
In fact, Russians’ disposable income fell 1% last year, forcing them to save more and spend less. This has reduced retail sales of this country by 6.7%.
Expert Alexandra Prokopenko, a former adviser to the Central Bank of Russia, says that Russians’ strong propensity to save is a sign of economic uncertainty.
However, the expert said that Russia’s financial leadership is used to responding to crises. These officials have been in power since the 2008 global financial crisis and have led the country through its deteriorating relationship with the West.