The Russian economy weathered Western sanctions, but how? | | Business News

In the aftermath of Russia’s invasion of Ukraine, Western leaders have proclaimed a sanctions regime that cripples the country’s war machine.

Joe Biden Claimed that Russia’s economy would be ‘halved’ boris johnson We talked about squeezing it “bit by bit”.

A year has passed, and that big promise has been slow to come true.

“Russia’s economic and governmental system has turned out to be much stronger than the West believed,” President Vladimir Putin said in a speech to parliament on Tuesday.

He also showed his strength at last month’s Economic Ministers’ Meeting. [gross domestic product] It will drop by 10%, 15%, or even 20%. ”

Instead, Russia contracted by a relatively modest 2.2% and is expected to grow by 0.3% this year, according to the International Monetary Fund.

it means sanction-hit country surpasses Britain.

Among Western leaders, these predictions would be unpleasant reading.

Sanctions on the Russian economy have eased over the past year, but to the surprise of most economists, Russia has weathered the storm.

This is mainly due to the country’s oil and gas reserves. Europe turned its back on Russia’s energy exports, but the country was able to take advantage of the delay in the ban, helping to strengthen its finances.

Earnings were strong due to the surge in global energy prices and the successful reorientation of trade to China and India.

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Russia was already sitting on a comfortable cushion.

The record post-invasion trade surplus came after years of conservative fiscal policy allowed the country to amass funds currently being waged in its war with Ukraine.

The country has had quiet sanctions to prove its economy for years.

Russians are enjoying record-low unemployment and wage growth, helping them weather the worst inflation spikes.

They are still wary of spending during times of economic instability, but the government is doing its best to encourage them by raising the minimum wage and pensions.

Economic data are not entirely reliable and do not provide a complete picture of the strains Russian society is undergoing, but the domestic economy is not collapsing as some have warned.

Putin is in high spirits, but it may not last long as cracks are starting to appear.

Now that Western countries have introduced price limits on Russia’s Urals, the main crude export blend, oil revenues are declining and the country’s finances are deteriorating as a result.

At the same time, Russia needs to increase its military spending and relies on sales of a foreign currency – the Chinese yuan – to support the ruble. I’m just starting to feel it.

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job

Russia’s standard of living is underpinned by record high wage growth and low unemployment.

When the war first broke out, analysts expected the withdrawal of foreign firms would lead to mass job losses.

Instead, the unemployment rate fell to a record low of 3.7%. This is because Western companies have handed over their operations to local partners, helping to retain jobs.

But the headline unemployment rate hides a significant decline in the working population.

Hundreds and thousands of skilled workers are leaving or fleeing the country to fight or find work elsewhere. Estimates range from 0.4% to 1.4% of the Russian workforce. This has weighed on economic growth, with the country’s central bank recently warning that “labor market conditions are severely limiting the ability of the Russian economy to expand production.”

Much like the UK, where a shrinking labor market is impacting the country’s economic prospects and putting pressure on inflation, Russia’s fate will depend on how much the size of its workforce recovers.

Oxford Economics economist Tatiana Orlova said: Property returned to Russia. ”

wage

A tight labor market has led to strong wage growth, especially for IT professionals, construction workers and hospitality staff, boosting living standards. Wages in Russia are growing at roughly the same pace as inflation, with the government raising pensions and the country’s minimum wage, which are set to rise another 10% next January following a 20% rise last year.

consumer spending

Oil revenues have gotten a lot of attention, but consumer spending remains the dominant part of the country’s economy, and the government hopes the extra money will encourage Russians to go out and spend. I’m in

However, you may have a big task ahead of you. Many analysts expect Russia to launch a new offensive in the coming weeks to capture the entire Donbass. If the country’s leadership announces a new wave of mobilization, consumer confidence is likely to fall again, prompting households to prioritize saving over spending.

“The savings-to-disposable income ratio has risen again and will remain high until the fighting subsides, hampering efforts by authorities to revive household demand,” Orlova said.

business investment

Re-mobilization could also put a strain on corporate confidence. Early in the conflict, economists believed business investment would collapse at the fastest pace in decades, but that hasn’t happened.

Big gains for oil, gas and fertilizer producers helped fund their business plans with a 6% increase in capital spending in 2021.

As Russia diverted energy exports to Asia, Russia needed a significant increase in infrastructure.

This has also helped boost the country’s manufacturing sector, albeit unevenly. For example, the country’s auto industry collapsed last year as manufacturers struggled to access key components and tools from the West. Other countries have responded by accessing parts from Turkey, which has not yet joined international sanctions.

oil and gas

Attempts to strangle the Russian economy were quickly stifled by Europe’s heavy dependence on Russian oil and gas exports.

Russia took advantage of this.

in the 9 months it took In order for the EU to agree and implement a bloc-wide ban on Russian oil exports, the Putin government would like the country to benefit from higher wholesale prices and an 86% increase in the current account surplus to $227.4 billion, enjoyed a record fiscal surplus.

This gave Russia a large cushion to fund the war effort and strengthen its currency, keeping import prices low and inflation under control.

Meanwhile, the country has also been able to redirect supplies to India and China, with total crude and fuel oil exports hitting a record 1.66 million barrels per day last month.

A MORE CHALLENGING YEAR 2023

This year will be a more challenging year.

The country’s finances are already starting to weaken as falling energy prices weigh on revenues. The $60 per barrel price cap for Russian crude imposed by the EU, G7 and Australia in December will force Russia to sell oil at heavily discounted prices compared to global Brent benchmarks. It means that

Recently, the limits have been extended to refined petroleum products as well.

Russia’s budget deficit reached £20.8bn in January, with oil and gas revenues down 46% for the year. At the same time, government spending increased by 59% over the year.

Economists see these as early signs of tension, with China having to sell more yuan and issue municipal bonds to support itself.

However, they were still relatively optimistic about the country’s prospects.

“The fiscal deficit widened in 2022, but remains modest at 2%, below levels seen during the pandemic and major financial crises,” said Sophia Donets, chief Russian economist at Renaissance Capital. .

She added: “With public debt below 20% of GDP, financing is unlikely to be a direct source of stress, but sustained growth in oil and gas earnings is likely to continue.” The decline will require medium-term fiscal consolidation and higher non-oil taxes.

“However, we estimate that this integration is not yet so urgent and could be delayed by up to two years.

Analysts said the country has room to raise more tax revenues by leveling windfall taxes on energy and fertilizer producers.

Importantly, Russia can comfortably meet its funding needs domestically.

Government and corporate external debt is very low and the government is building a strong sovereign wealth fund.

“We must not forget that Russia has spent most of the decade of economic sanctions,” said Liam Peaches of Capital Economics.

“What this meant was that they were excluded from the global capital markets and that sanctions against various companies, banks and governments had little impact on their financial needs. Because, for example, the Russian government can go on for eight months without issuing debt.”