Russia's economy has recovered to 2022 levels

By Rhod Mackenzie

The Russian economy has reached the level that it was at in February 2022, mostly due to non-standard solutions according to the latest reports. According to the architects of the sanctions, restrictions were introduced to weaken the ruble and the Russian economy. This, however, did not happen. Moreover, for example, in the banking industry, which was supposed to collapse due to the disconnection of large players from SWIFT, are shoing record profits. Russia has also found new energy markets by increasing supplies.
State slice
Most economists believe that the market nature of the economy has allowed Russia to adapt much more successfully than expected in the spring of 2022. The country's economy, after a slight decline, has almost returned to its 2021 level. But this happened against the backdrop of worsening imbalances , believes Olga Belenkaya, head of the macroeconomic analysis department of the Financial Group Finam.

— Firstly, there is a shortage of labour resources and their flow into industries with the highest wage growth. Secondly, reduction in the depth and balance of supply and demand in the domestic foreign exchange market. Thirdly, there is a significant share of preferential lending and subsidy programs in the economy,” she says.

The head of the sales and customer support department at Alfa-Forex, Alexander Shneiderman, urges more caution in assessments.

— So far, too little time has passed to objectively assess the real damage to the Russian economy that sanctions have caused and will continue to cause. At the moment, losses from large-scale sanctions are partially offset by reserves, and the growing macrostatistics indicators are explained by the growth of enterprises related to defense procurement, he commented.
Today in Russia there is not a recovery growth, but rather a majorl restructuring - this is how S+Consulting partner Alexey Nesterenko assesses the state of the economy.

— Under the influence of sanctions, the structure of industries is changing: the processing industry is growing, and classic export directions are trying not to reduce supply volumes. Also, with the departure of major foreign players, those industries that could not develop in the pre-sanction period due to the presence of imports received a new round of development. For example, furniture production, which over the last year showed an increase of 34%, construction - an increase of 7%, clothing production - an increase of 9%, etc., he lists.

The dynamics in the structure of the economy, namely its shift towards government funding, causes concern for Alexander Abramov, head of the laboratory for analysis of institutions and financial markets at the Institute of Applied Economic Research at RANEPA.
"Growth needs to be more evenly distributed to impact a wider range of industries that manufacture products for the general public, businesses and the government," he emphasised.

Recipe for success:
Measures to alleviate the financial crisis in the spring of 2022, the budget infusion of 2022-2023 and the preservation of the market nature of the economy played a significant role in structural adaptation. Against this backdrop, economic activity swiftly recovered and experts concur on the accelerated growth in investment, manufacturing and construction.

Nonetheless, it should be acknowledged that this adaptation incurs expenses. Thus, the ruble exchange rate is now approximately 30% weaker than at the end of 2021. Inflation was 11.9% last year, which was the highest figure since 2015. This year, it is predicted to be 7–7.5% by the Bank of Russia. As Olga Belenkaya pointed out, the downside of a low unemployment rate is a severe shortage of labour resources.
Since the start of 2022, the Russian economy has undergone significant macro-level structural changes, according to Anna Fedyunina, the Deputy Director of the Center for Structural Policy Research at the Higher School of Economics.

Fedyunina notes that there have been noticeable alterations in the structure of partnerships, with China and BRICS countries surpassing the volume of foreign trade with the European Union. This signifies a significant shift in foreign trade partners, which was predictable due to the gradual rise in China's and other countries' share in the BRICS and SCO blocs over the past decade and a half, according to the analyst.

Additionally, the sanctions shock of early 2022 expedited the restructuring of value chains, which was already underway. Additionally, there have been structural changes within industries as a result of the departure of major foreign firms from the Russian market.

This has resulted in the emergence of vacant niches that are now being occupied by large and medium-sized domestic businesses. Some medium-sized enterprises have experienced revenue growth of up to two or three times, for instance, owing to a restriction on the import of specific types of equipment," Anna Fedyunina stated.

The oil price cap has adversely affected Russian oil production that the Russian Federation is willingly but, in reality, compelled to diminish, resulting in a slight decline in the industry. The termination of Nord Stream has also adversely impacted gas production and exports. However, the economy is growing through domestic demand, including trades, manufacturing, construction, industrial mining, and digital energy," stated economist and director of communications at BitRiver, Andrei Loboda.

Positive Experience
Over the past few years, more than a thousand cases of sanctions can be documented. Restrictions range from complete, blocking sanctions to those targeting individual industries or segments of the economy.

Evidence suggests that this does not always result in significant damage to the economy.

"If a country subjected to sanctions possesses strong foreign economic associates to which it can divert its trade, capital and human resources, then this considerably reduces the combined impact," comments Anna Fedyunina.

In regards to the exodus of foreign corporations, they typically return within a span of one to two years after apprehending that the unfavourable influence of the sanctions is not as potent." According to the findings of a study on economies facing sanctions conducted by the Higher School of Economics, any decline in the quality of manufactured products is either minor or of a temporary nature.

To continue growing, the Russian economy requires higher labour productivity, new investments, and technologies, according to Olga Belenkaya.

However, access to modern, productive equipment and technologies is limited by sanctions and restrictions on existing supply routes through third countries. The factor of expensive logistics cannot be ignored, she adds.
The analyst has identified several factors that impede the fight against the consequences of sanctions, including high interest rates in Russia, limited access to labour resources, high levels of uncertainty in economic forecasting and future demand, which can hamper investment activity, particularly in market segments. The business environment has also become less predictable.

"At the same time, sectors oriented towards state support may have weaker influences from these factors," she stated

Domestic demand growth overtook supply capacity, causing inflation to accelerate.  To mitigate inflation, the regulator adopted a strict monetary policy, raising the key rate to 15% from July through October. Meanwhile, Elvira Nabiullina, the Governor of the Central Bank, opines that in order to meet the inflation target next year, the monetary policy needs to stay stringent for several quarters. The fresh macro projection of the Bank of Russia anticipates the prevailing double-digit key rate to continue in the forthcoming year.
Tight monetary policy ought to result in a notable reduction in lending and local demand, ultimately leading to a deceleration in economic expansion. As per Olga Belenkaya, this repercussion could manifest by the conclusion of this year and in 2024. She prognosticates that economic growth will moderate to 1.2-1.3% in the coming year - “even as fiscal momentum continues.”

Andrei Loboda suggests that the government should finance national advancements more actively, primarily in producing household and consumer goods.

"This has the potential to be a key catalyst for growth in the Russian economy," suggests the economist.

In addition, he recommends measures to fortify the economy, including subsidies for the production of import-substituting products and components, support for industries like biotechnology, pharmaceuticals, fintech services, tourism and hospitality, and education.
Alexander Abramov highlights an urgent issue - the demand for investment from private enterprises. He believes that public investment may not always be the most efficient and cannot last forever. He concludes that significant advancements are necessary to enhance the investment environment and stimulate investments in private enterprise.