“Better than expected”: the Russian economy has shown stability

The government believes that the measures taken to support the domestic economy in the face of sanctions have shown effectiveness. This was stated by Prime Minister Mikhail Mishustin at a meeting of the presidium of the government commission to increase the stability of the economy in the face of sanctions. Among the main priorities, he named the restoration of the dynamics of investment in the real sector of the economy, the development of private initiative, the fulfillment of social obligations and the support of citizens. Let’s try to figure out how true the words and expectations of the head of government are.

If we summarize everything that has happened since the introduction of new sanctions against Russia, we can conclude that the situation in the Russian economy is developing much better than most experts expected a few months ago. Of course, in the face of unprecedented restrictions in the Russian economy, a high level of uncertainty remains, not to mention the potential risks for the global economy as a whole (a slowdown in growth rates and even a potential recession in a number of the world’s largest economies). But it is already clear that the actions of the government, the Central Bank and many economic agents to find new export markets and new logistics routes for exports and imports have softened the depth of a possible recession.

So, in March, experts said they expected the economy to decline by more than 10 percent this year. Now the consensus is that the decline at the end of the year will not exceed 5 percent. At the same time, the Central Bank announces expectations of a decline at the level of 4-6 percent, while government representatives voice more positive figures of 2-4 percent. This approach is shared by both “internal” and “external” observers. Thus, in its recent article, The Economist magazine, on the one hand, has no doubt that in the perspective of three to five years the sanctions will have a “devastating effect” on the economy of our country, but at the same time it also admits that the idea of ​​a crushing blow “did not materialize” . In particular, the article says that Russia’s GDP should decline by 6 percent by the end of 2022, which is much less than the 15 percent drop expected in March.

The situation in oil production, which is extremely important for our economy, looks better than expected. The efforts of the companies made it possible to very quickly reorient a significant part of oil exports to Asian markets. For a number of other industries dependent on exports, it is more difficult. In metallurgy and the timber processing complex, the recession turned out to be deeper; in addition, industries dependent on intermediate imports, such as the automotive industry, suffered significantly. However, agriculture, construction, part of the industries focused on domestic demand and less dependent on intermediate imports – pharmaceuticals and the production of building materials – are doing very well.

Now we can confidently say that by the end of the year, inflation will also be much lower than the March forecasts at more than twenty percent. Expectations are stated that inflation may be below 14 percent. It should be noted that the Bank of Russia has convincingly shown its ability to control the situation at a difficult moment. As a demonstration of this, there is a strong ruble and the ongoing decline in prices for several months compared to peak spring levels.

It should be noted that this year the food market was also “lucky” – the harvest is good. On the one hand, it has become more difficult to export grain due to a number of logistical restrictions. Due to the same restrictions and sanctions for a number of product categories, prices in the domestic market have been falling for more than a month; here we can distinguish a number of product categories in metallurgy, woodworking, and building materials. Since the beginning of the year, the price of petrol has not risen.

It should be recognized that unemployment is only so far at historical lows. It, unfortunately, will inevitably grow, because the economy will shrink, the processes of structural adjustment are underway. But at the same time, we are unlikely to see unemployment above 5.5-6 percent, even in the most pessimistic scenario. For comparison, the average unemployment rate in the EU countries in 2022-2023, according to the latest forecasts of the European Commission, will remain above 6 percent.

For Russia, the obvious challenge is the negative dynamics of real incomes of the population, primarily wages. However, this situation is inevitable in the face of severe external restrictions, recession and economic restructuring. On the other hand, a noticeable increase in pensions and other social benefits served as a certain damper, which made it possible to significantly support the dynamics of disposable income.

It is important to note that the volume of loans issued is slightly growing from month to month, and since June the growth of lending in the retail segment has resumed, in the corporate segment it has been growing since May. This is a signal that both banks and borrowers look to the future with more optimism than they did a few months ago. This trend has already been felt by retail trade, where the recession continues to gradually decrease every month.

It can be recognized that there is progress in foreign trade as well. Albeit not as fast as we would like, but there are alternative ways to import. Imports of consumer goods are recovering and replacing the fastest. At the same time, the situation is more complicated with investment and intermediate imports, where it is not always possible to find a “replacement” and where more external restrictions have been introduced. At least as fast as we would like. After all, the beginning of the recovery of economic growth will largely depend on the speed of resolving this issue.

It seems that the most significant medium- and long-term risk remains the high dependence of exports and the economy as a whole on commodity prices, primarily oil. In the event of a negative scenario for the development of the world economy, both demand and prices will decrease. The country needs to prepare for such a very real scenario today. Even though the world market situation continues to develop in a positive way for Russia.