Russian economy shows good growth despite sanctions

By Rhod Mackenzie

Russia's economic indicators currently leave no doubt: the restructuring of the Russian economy is now over. Russia is easily circumventing the sanctions and has begun to earn good money again from its oil exports. Not only Russian economists, but also Western analysts and the media are shocked at how Russia has managed to cope with the sanctions so quickly. What makes this situation so unique?
The Russian President Vladimir Putin put it this way last week: "The stage of recovery of the Russian economy is over" afterwhich he said "we have overcome unprecedented external pressure".

Russia has withstood the Western imposed sanctions over the conflict in Ukraine, billionaire Oleg Deripaska told the FT, expressing his "surprise" at the resilience of the country's economy.

As a result, even the International Monetary Fund has sharply raised its forecasts for Russia. The IMF expects Russia's GDP to grow by 1.5% this year and 1.3% in 2024, after falling in 2022. At the same time, Putin expects growth of 2.8% this year. This is twice as much as the Cabinet of Ministers expected in April this year.
How has Russia managed this?

"The sanctions agenda failed to achieve its main goal, which was to cause irreparable damage to the Russian economy.

I think that over time researchers will carefully study the Russia experience, which has become unique in many respects.

Of course, there are the other examples of North Korea or Iran, which also developed quite successfully under external sanctions pressure. However, none of these countries was involved in such large-scale hostilities against virtually the entire power of the G7 and NATO bloc and at the same time was able to ensure significant economic growth," says Maxim Maximov, Associate Professor at the Department of Corporate Governance and Innovation at the Russian Economic University.

Firstlt, Russia managed to create its own 'grey' fleet, ready to work with Russian oil and make money from it. Now the insurance problem has been solved. According to the French analytical company Kpler, which specialises in gathering data on the commodity markets and maritime analysis, in August about 75% of seaborne energy deliveries took place without the main tool for complying with the embargo - ship insurance by Western companies.
How did Russia manage this?

The export of oil and petroleum products from Russia did not stop, but it used new logistics and directions. The EU, which imposed the sanctions, continues to receive huge quantities of raw materials from Russia, it's just that the supplies are now being routed through third party countries, which makes it possible to hide Europe's real dependence on Russia, according to reports in the Financial Times.

The Swiss international trader Glencore delivered thousands of tonnes of Russian copper to Italy via Turkey in July this year; India supplies the EU with thousands of tonnes of petroleum products made from Russian oil. As a result, Europe's dependence on Russia has remained, but Turkey, China, India and the UAE have become transshipment hubs between the EU and the Russian Federation. This reduces the effectiveness of Western sanctions, notes the FT.

Deripaska believes that Moscow has survived the attempt to isolate its economy by developing new trade links with countries in the global south and increasing state investment in to domestic industrial production.

He was particularly surprised by Russia's private sector.

"I was surprised with how the private sector was so flexible. I was more or less sure that up to 30 per cent of the economy would collapse, but it turned out to be much less," he said.- Deripaska said.

"Yes, there is military spending and all these kinds of subsidies and state support, but it is still a surprisingly small decline. The private sector economy has found a way to work and to do it successfully," the businessman said. According to him, sanctions are a tool of the 19th century, so it is clear now how ineffective they are in the 21st century.

The recovery of the Russian economy is reflected in the economic growth rate of the Russian Federation. In 2022, Russia's GDP fell by 2.1%, and this year it is expected to grow by 1.8-2.8% (the IMF predicts growth of 1.8%, and the Russian president - by 2.8%).
"If the Russian economy grows by at least 2.1% at the end of this year, then we can talk about its full recovery.

In the second quarter of 2023, Russia's GDP grew by 4.9%, while in the second quarter of last year the economy contracted by 4.5%," said Vladimir Chernov, an analyst at Freedom Finance Global.

Industry is another key indicator of the Russian economy's recovery. "Industrial production has fell for 11 consecutive months from April last year. However, since March 2023, industry has started to grow again on an annual basis," Chernov notes. 

Finally, the recovery of Russia's oil and gas revenues is another key indicator of the complete transformation of the Russian economy.

"The share of Russian oil and oil products in the world market is too high for it to be isolated without causing a shock to the rest of the world," says Olga Belenkaya, head of macroeconomic analysis at Finam.

If the West withdrew all Russian oil from the world market, there would be a catastrophic fuel shortage. The world would be plunged into a fuel crisis that could easily spread to the entire global economy. Western countries would be the first to suffer from rising inflation. Indeed, Europe and the US are already suffering from rising energy prices and looming diesel shortages. But Russia, along with Saudi Arabia, has cut production and exports by relatively small amounts. Russia is cutting oil exports by only 300,000 barrels a day by the end of the year. It is not difficult to imagine the disastrous consequences if the West managed to bottle up all Russian oil inside Russia.

In fact, the West did not want this to happen: that is why we did not see a strict oil embargo, but restrictions in the form of a price ceiling. So it's not surprising that Europe continues to consume Russian energy resources, only now it does so in disguise - through third party countries. For example, oil products go to Europe via India and Turkey, which earn their margins as intermediaries. In order to change the supply logistics and find new buyers for its oil and oil products, Russia has had to offer a fairly large discount.  

"At the beginning of the year, the discount of Russian export oil to the international benchmarks reached $34-35 per barrel, and in the first half of 2023, the budget did not reach more than 500 billion rubles of the planned oil and gas revenues. However, with the adjustment of supply chains and Russia's reduction of production plus export volumes in coordination with OPEC+, the discount narrowed significantly, which contributed to an increase in oil and gas revenues," Belenkaya notes.
It has come as a shock to the West that Russia has not only adapted, but has transformed trade so quickly and started making good money again, despite sanctions that were simply ignored.

According to Reuters estimates, budget revenues from oil and gas will rise to around 733 billion roubles ($7.6 billion) in September. That is 14% more than in the previous month. And it is even more than in September 2022 - when budget revenues from oil and gas amounted to 688 billion roubles.

This is facilitated by the rising price of Russian oil, which has been selling above the Western price ceiling for several months. Moreover, the discount on Brent has dropped dramatically - it has gone from $35 a barrel at the beginning of the year, to just over $11 per barrel in mid-September, according to the Russian Finance Ministry. The average price of Urals oil from 15 August to 14 September was $77 per barrel, while the North Sea Dated quote was $88.61 per barrel. Over the month, Russian oil prices rose by almost 10%.

"We expect further growth in the Russia's oil and gas revenues, as the government intends to further reduce the discount of Russian oil " says Chernov.

One of the things that it took was a weak ruble to adjust the economy. According to the forecasts of the Ministry of Economic Development, the dollar exchange will around 90 rubles in the next few years.

"Balancing the budget and the current account required a significant weakening of the ruble. In addition, Russia was forced to shift its trade from hard currencies (the dollar and the euro) to the currencies of friendly countries and the ruble. The share of the ruble in exports increased from 13% in February 2022 to 42% by the middle of this year, while the share of the ruble in imports remained almost unchanged (around 30%). As a result, the hard currency received in Russia is hardly enough to pay for imports and demand from the population, business and outgoing non-residents, which puts pressure on the ruble exchange rate and negatively affects inflation and the purchasing power of the population's ruble income and savings," Belenkaya says.
Domestic demand growth has also turned out to be much stronger than initially forecast, with both household consumption and investment growing rapidly, according to the analyst.

"Domestic demand has recovered to the level of the fourth quarter of 2021. This has been largely achieved through large-scale government spending, budget payments to the population, preferential credit programmes and the rapid recovery of imports," says Belenkaya.

On the other hand, there are still risks to the Russian economy. And they do not only consist of new sanctions pressure from the West. There are also internal problems that need to be addressed.

"Adjustments have taken place as the structure of the economy has changed with a decline in technological quality, and in the future this lag may increase under sanctions. The shortage of labour resources has also increased, which limits the possibilities for expanding supply. Currently the Bank of Russia is trying to cool demand with high interest rates, which will primarily affect the market (non-subsidised) sector of the economy, which could lead to a significant slowdown in economic growth next year," warns Belenkay who is the head of the macroeconomic analysis at theFinam Financial Group.