Moody’s: Russian authorities may resort to monetary financing of the budget

Russia’s GDP will contract by 3% in 2023 against the backdrop of Western sanctions, follows from the medium-term forecast for the Russian economy by the international rating agency Moody’s. The agency believes that in order to stabilize the economy, the Russian government will resort to “unorthodox financial policy”, in particular, monetary financing of the budget – debt monetization, when the Central Bank directly finances the state budget deficit – which, according to the agency’s analysts, may negatively affect inflation and macro-financial stability.

In materials Moody’s, which leads RBC, it is noted that the initial forecast for the Russian economy for 2022 about a reduction of 7% did not come true. However, the agency expects that “the recession in Russia will deepen” under the influence of the negative impact of sanctions restrictions on Russian exports.

Due to the reduction in exports, the positive balance of payments will worsen, which, in turn, will lead to a weakening of the ruble. Sanctions and the rupture of economic ties with Western countries, the report states, will also have a negative impact on the long-term growth potential of the Russian economy, which Moody’s estimated at 1.6% until 2022.

It follows from the rating agency’s forecast that price restrictions on Russian oil and oil products introduced by the G7, the European Union (EU) and Australia will lead to a deterioration in the access of the Russian economy to foreign currency in the future. If the decline in oil production exceeds announced by the Russian government 5% (500,000 barrels per day), Russia’s GDP could be much lower than Moody’s baseline forecast. The agency expects Russia’s current account surplus to decline from 10.4% of GDP ($227 billion) in 2022 to 6% of GDP in 2023.

“As we gradually adapt to the sanctions climate, Russia’s real GDP growth is expected to return to around 1% in 2024. There is evidence that Russia has managed to replace some sanctioned goods, including by developing domestic alternatives. However, most likely, this is achieved at the cost of increasing costs and reducing quality,” Moody’s said in a forecast.

Based on an analysis of data from Chinese customs and the European statistical agency Eurostat, Moody’s claims that China has replaced Russia with about 20% of EU imports. At the same time, the agency did not take into account the tenth package of sanctions, which imposed restrictions on exports from the EU in the amount of €11.4 billion. Moody’s notes that Turkey and some CIS countries serve as the basis for the re-export of Western, including European goods.

The agency believes that Russia’s federal budget deficit in 2023 will be 3.5% of GDP. “Despite weakening revenues, the government plans to increase spending, mainly on national security and defense. Cuts to other spending, such as infrastructure, will exacerbate the impact of international sanctions on potential growth,” Moody’s said.

“We estimate that with Urals prices at $50 per barrel, the liquid part of the NWF (National Welfare Fund.— “b”) will be exhausted by 2027 if deficits are covered solely by reserves,” notes Moody’s.

In the longer term, the dependence of the Russian budget on the banking sector will increase, the agency expects. “Banks have significant resources for additional government funding, since only 9.6% of their assets are public debt,” writes Moody’s. At the same time, large borrowings from credit institutions will lead to an increase in the “interest burden of the state.”

According to the September estimates of the Ministry of Economic Development, GDP in 2023 will decrease by 0.8%. In January, the Bank of Russia published the results of a survey of analysts who predicted a 1.5% decline in GDP this year. The International Monetary Fund expects the Russian economy to grow by 0.3% this year.

About how the World Bank assesses the dynamics of the GDP of the Russian Federation – in the material “Kommersant” “Definitely no good”.