How is Russia’s economy holding up?

Predictions of Russian economic crash following Ukraine invasion have proved wide of the mark – but Moscow faces a rocky 2023

The EU has agreed a $60 price cap on Russian oil
The EU has agreed a $60 price cap on Russian oil
(Image credit: Illustration by Jonathan Raa/NurPhoto via Getty Images)

A predicted economic collapse in Russia triggered by international sanctions has failed to materialise, according to latest figures.

Moscow’s invasion of Ukraine has driven up global energy costs and intensified a cost-of-living crisis across much of Europe and the West.

The Russian economy was also expected to crash, as a result of Western sanctions. Back in April and May, “most forecasters” expected the country’s GDP to fall by as much as 15% by the end of the year, with investments expected to drop by up to 28% as prices rose by up to 25%, according to the Wilson Center. But “things turned out differently”, said the Washington D.C.-based think tank.

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What happened?

GDP decline for Russia in 2022 is expected to be more like 3.4%-5.5%, based on analysis by the World Bank, the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD). And inflation is expected to peak at around 14% but to then decline sharply next year, the European Council reported.

The past 12 months have still marked “a bad year for the Russian economy”, said the EU body, yet it could have been a lot worse.

What impact is the war having?

Western sanctions aimed at weakening Russia’s ability to finance the war have so far failed to bring Moscow to heel.

Instead, “higher energy prices have helped boost Russia’s budget revenue, half of which comes from oil and gas”, said the Financial Times, while “lower export sales, following the cutting of trade ties with Ukraine’s allies, also helped boost the rouble”.

Russia’s central bank announced last week that the country’s current account surplus had more than doubled to $225.7bn in January-November from $108.6bn in the same period last year.

Sanctions on Russian exports have “proved ineffective in the short term because high energy prices continued to fill the state’s coffers”, said Russian journalist Boris Grozovski in a blog for the Wilson Center’s Kennan Institute. And state aid to banks and companies have “enabled them to keep up investment levels”.

The military enlistment drive that took place in September and October, however, “has done to the Russian economy what the West’s sanctions have so far failed to do”, Grozovski added.

“The real estate market, demand for credit, and consumer sentiment all show a noticeable decline. Absent oil and gas revenues, the federal budget would be in deep deficit. Russia’s brainwashed citizens are starting to suspect that the war is eating away at their well-being,” he concluded.

What is forecast for 2023 and beyond?

The expected economic “nosedive” in Russia might not have come to pass, but the long-term costs of the Ukraine war will be “staggering”, predicted Russian economist Konstantin Sonin in Foreign Affairs.

To expect sanctions to act as a short-term “missile strike” was unrealistic, said Sonin, a professor at the University of Chicago Harris School of Public Policy. But in the long run, they “can weaken the economy and lower GDP”. The “disastrous, misguided war” has put Russia on the “road to ruin”, he added.

Following the implementation of a “near-total ban” on imports of Russian crude into the EU, said Bloomberg oil strategist Julian Lee, the “last Russian barrels have been shipped to ports in Europe”. Moscow “has lost a market on its doorstep for more than 1.5m barrels a day”, Lee wrote, while the world has been “able to cope” with the diversion of Russian crude to Asia.

According to World Bank, IMF and OECD analysis, Russia’s economy will continue to shrink in 2023, with GDP forecast to decline by between 2.3% and 4.5% year-on-year – by far the biggest expected contraction among the G20 group of leading developed and developing nations.

Inflation in Russia, which reached 12.9% in October, is expected to slow to between 5% and 7% in 2023, before returning to the central bank’s 4% target in 2024.

“The factor that will significantly and radically worsen the situation next year is mobilisation,” Evgeniy Nadorshin, chief economist at PF Capital, told a recent debt market conference.

If Putin decides to escalate the war further and push for full mobilisation, hundreds of thousands more young men could be called up to fight, leading to significant labour shortages across Russia.

Combined with a G7 price cap of $60 per barrel for oil, such labour shortages “could undermine any chance of Russia mounting a sustained economic recovery in the months ahead”, said Reuters

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