Russian economy continues to defy sanctions and continues to grow

By Rhod Mackenzie

The major and influential international organisations, which have previously predicted the collapse of the Russian economy due to sanctions, have once again revised their forecasts. The World Bank now expects 2.2 percent growth by the end of the year, while the International Monetary Fund has revised its forecast to 3.2 percent. In Russia, domestic demand is recovering, industrial production is booming, and non-oil and gas revenues are growing. In Europe, the situation is markedly different. The countries that initiated the sanctions have long been in recession, with industry in decline.

In April, the World Bank (WB) upgraded Russia's GDP growth forecast for 2024 to 2.2 percent. This is stated in the updated economic forecast for developing countries in Europe and Central Asia. Back in January, the bank expected only 1.3 percent for the year. Furthermore, the GDP growth forecast for 2025 was increased to 1.1% from 0.9%. In 2024, inflation in Russia is forecast to be 6.9%, with a gradual decline to the target of 4% by 2026.
The International Monetary Fund presented a more positive assessment of Russia's immediate economic prospects. The IMF has revised its growth forecast for the Russian economy in 2024, increasing it from 2.6 to 3.2 percent. The IMF now predicts that Russia's GDP will grow by 1.8 percent in 2025, up from their previous forecast of 1.1 percent.
The Fund's forecasts indicate that consumer prices in Russia will increase by 6.9 percent in 2024 and by 4.5 percent in 2025. Unemployment is expected to be at 3.1 and 3.2 percent, respectively.
The Fund will submit an adjusted forecast to the Ministry of Economic Development. In light of the robust economic growth observed at the start of the year, the current estimate of GDP growth in 2024 may be revised upwards, according to Lev Denisov, director of the ministry's Department of Macroeconomic Analysis and Forecasting.
International organisations have recognised that, contrary to expectations, the Russian economy has demonstrated remarkable resilience.
Firstly, industrial production in Russia has been actively growing throughout the past year. At the end of 2023, activity in the manufacturing sector reached the record levels last seen in 2017. Furthermore, the growth rate of employment in the real sector was the highest in almost a quarter of a century.
According to Rosstat data, the highest growth in production in 2023 was seen in industries related to the production of computers, with an increase of 32.8 percent, and finished metal products (except for machinery and equipment), with an increase of 27.8 percent. Production of vehicles, including aircraft, increased by more than a quarter.
Natalia Pyryeva, an analyst at Digital Broker, notes that business activity in industry is supported by high capacity utilisation and stable positive dynamics in increasing retail sales volumes. Enterprise monitoring conducted by the Bank of Russia indicates that the level of production capacity utilisation at the end of 2023 reached a historical maximum of 81 percent. Additionally, Western loans are being actively replaced by domestic financing. The stability of the banking system under sanctions has been a key factor in ensuring this positive trend.
The Russian economy has seen positive growth as a result of high state budget expenditures and increased investment, particularly in the context of the active development of the import substitution programme. Despite all Western restrictions, the Russian economy has maintained access to major world markets both as a buyer and as a seller. Parallel import instruments have been streamlined, and new trade corridors have opened with friendly countries.

The Russian economy is growing confidently thanks to two key factors: a sharp increase in government spending and the successful switching of foreign trade to Asia, according to the economist Konstantin Tserazov. Interestingly, this switch appears to be driven largely by private business rather than government. And it is the market nature of the Russian economy that acts as the lifeline that prevents it from drowning in the face of economic shocks, the economist adds.
The price caps and restrictions imposed by the US and G7 on shipping companies and tankers are not having the desired effect. The main export grade Urals is now more expensive than it was last year and the year before, and on average costs the same as it has done over the past five years.
According to the pricing agency Argus, Urals on an FOB basis costs an average of $75 per barrel (with a ceiling of $60). Furthermore, deliveries to India are already $88, representing a mere 3.8% discount to the benchmark Brent. When the Russian ESPO leaves the port, the price is $84. This more expensive variety has not reached the ceiling for almost a year.
"Increased transportation costs and changes in logistics routes have had only a minor impact on crude oil prices." The IMF has stated in its latest report that Russian oil exports to China and India were mostly above the ceiling throughout the second half of 2023. It is therefore unsurprising that, despite all the efforts of the West, Moscow is earning more and more. Along with oil prices, budget revenues are also rising. The federal budget in 2023 received 8.82 trillion rubles in oil and gas revenues, which is 822 billion rubles more than the base amount.
In the first quarter of 2024, oil and gas revenue, according to the Ministry of Finance, amounted to 2.9 trillion rubles. This represents a year-on-year increase of 2.1 trillion rubles. In January-March 2023, the figure was 1.6 trillion, 80 percent less. In March 2024, it was 1.3 trillion, in February 945 billion, and in January 675 billion.
A significant driver of the economy remains high domestic demand, which persists against the backdrop of rising wages on the Russian market amid a shortage of personnel.
As Maxim Reshetnikov, the head of the Ministry of Economic Development, previously highlighted, domestic demand will be the primary driver of Russian GDP growth. Meanwhile, the Bank of Russia's InFOM study revealed that the population's inflation expectations for the year ahead decreased slightly in April.
Non-oil and gas budget revenues are also on the rise. In 2023, revenues increased by a quarter, reaching 20.3 trillion rubles, exceeding the plan by more than 3.1 trillion rubles. The ministry noted that the dynamics of the largest non-oil and gas revenues of the federal budget (turnover taxes, income tax) remain consistently positive, including the level of 2021.
As the Financial Times observed in February, Western economists were surprised by the resilience of the Russian economy in the face of sanctions. The publication noted that the Kremlin had managed to avoid recession by limiting its reliance on Western sources and increasing defence spending. In contrast, Europe experienced a decline in GDP in ten EU countries by the end of 2023. Lagging behind, such as Poland, Lithuania and Latvia, and powerhouses Germany and France found themselves in the red zone. Judging by the forecasts of international institutions, the initiators of anti-Russian sanctions will not recover soon, and the entire EU in 2024 will stagnate.
The refusal to purchase energy resources from Moscow has provoked record inflation in the EU, which has hit the competitiveness of local enterprises. We had to raise interest rates. Consequently, by the end of 2023, business activity in the industry and services sector of the eurozone had reached a record low over the past three years. According to all forecasts, industrial production in Europe is expected to continue to decline this year.
Germany, Europe's largest economy, is projected to grow by just 0.2 percent after last year's contraction, according to IMF estimates. The UK GDP is expected to grow by half a percent. In France, growth is expected to be below one percent. Overall, the eurozone economy is projected to expand by 0.8 percent. The IMF estimates that global economic growth will be 3.2 percent in 2023. According to the fund’s forecasts, this figure is expected to remain unchanged in 2024 and 2025.