Russia's income began to grow again in spite of the West's sanctions

By Olga Samofalova

The Russian economy has got used to and overcome the effects of sanctions.
After a difficult first half of the year, when Russia's oil and gas revenues fell sharply and the budget faced large deficits, the Russian economy has begun to emerge from its slump. The growth of the country's income and GDP shows that the Russian economy is has fully adapted to sanctions, said Prime Minister Mikhail Mishustin. It has really taken off in the second half of the year and is continuing to go up in spite of the West's sanctions.
The statistics show that the Russian economy is has adapted to its current challenges, the Prime Minister Mikhail Mishustin said.

According to him, in August the budget had s already reached a surplus of 230 billion rubles, plus the consolidated balance of the regions gave another 140 billion rubles. This was largely due to a significant increase in non-oil and gas revenues, which at the end of August exceeded 1 trillion 820 billion rubles, which is 56.5% more than last year, the head of government noted. This situation gives grounds for an improvement in the budget situation in 2024, he believes.

“Since the third quarter of 2023, economic growth has begun in Russia and has consolidated. According to the Ministry of Economic Development, in July GDP exceeded the 2022 level by 5%, and the level of two years ago - by almost 1%. In general, over the seven months of 2023, the figure increased by more than 2%,” Mishustin emphasized.

Industrial production made the main contribution to the country's GDP growth. “In July, industrial production increased by almost 5%, in June – about 6%. If we take seven months, the main driver was the manufacturing industry. There the growth was about 6%,” the Prime Minister specified. According to him, the production of computers, electronics, optics is above 30%, electrical equipment - more than 20%. There are good indicators in the metallurgical and food industries, in the production of clothing, plastic products, rubber and furniture, Mishustin concluded.

“It cannot be said that sanctions did not affect the Russian economy.

In the first half of 2023, there was a decline in Russian exports of petroleum products and gas by more than $40 billion compared to the same period in 2022. Against this background, oil and gas revenues decreased by almost 50%,”

– says Tatyana Skryl, associate professor of the Department of Economic Theory of the Russian Economic University. Plekhanov.

However, since July the situation has begun to improve. What explains the recent success? “The economy has largely been able to adapt to the new conditions. The adaptation process includes not only a change in the recipients of Russian exports, but also the replacement of imports that previously came from Western countries. In addition to building new logistics, it is worth adding here the adaptation of the financial system and the capital markets,” says Vladimir Evstifeev, head of the analytical department of Zenit Bank.

The Ministry of Finance data for August indicate that the fiscal revenue situation has begun to improve, thanks to a recovery in oil export revenues and a special contribution from non-oil and gas revenues.

As for oil and gas revenues, they are still lower than last year: over the first eight months of 2023 - by 38%. However, the gap is gradually closing, and this is already an achievement.

“In July, oil and gas revenues for the first time this year exceeded the base level, calculated at 8 trillion rubles per year.

Thanks to the AIT, paid quarterly, and in August they fell only slightly short of the basic level,” notes Olga Belenkaya, head of the macroeconomic analysis department of the Financial Group Finam.

This happened due to the increase in the price of Russian Urals crude. The coordinated actions of Saudi Arabia and Russia in the oil market are yielding results. According to the Ministry of Finance, in August the average price of Russian oil was $74 per barrel, above the $60 price ceiling set by Western sanctions.

In addition, the discount on Russian oil is being reduced. “Starting from September, the maximum discount on the price of Urals to Brent will be reduced from $25 per barrel to $20, and payments to oil companies under the damper mechanism will also be halved. However, according to media reports, the Ministry of Energy is asking to “play back” this decision, which became the trigger for a sharp increase in wholesale fuel prices since the spring,” notes Belenkaya.

The weakening of the ruble exchange rate also played a role. “The average value in July was close to 95 rubles per dollar, with the budgeted average annual rate of 68.3 rubles per dollar,” Belenkaya points out.

Oil and gas revenues are negatively impacted by a reduction in gas exports, as well as a decrease in oil production by 500 thousand barrels per day and a decrease in oil exports by 300 thousand barrels since September (there was more in August) as part of an agreement with Saudi Arabia. But here Russia chooses to trade in smaller volumes, but at a higher price, than vice versa.

Non-oil and gas revenues provide strong support to the budget. In the first eight months they grew by 24%, and in August growth accelerated to more than 56%.

Belenkaya notes. According to her, this is mainly due to an increase in VAT (by approximately the same percentage), as well as an increase in income tax revenues. In addition, the Ministry of Finance hopes to receive about 300 billion rubles of additional revenue through windfall tax (one-time tax on excess profits).

“The growth of non-oil and gas revenues is the result of an increase in the indirect tax burden on business, as well as an increase in income from taxes on individuals due to a decrease in unemployment,” says Evstifeev.

Tatyana Skryl connects the growth in non-oil and gas revenues with an increase in government spending, including on defense orders, some of which are later returned in the form of taxes. “Today, the growth driver of the Russian economy is the military-industrial complex, which creates demand for goods of the industrial complex, creates jobs, and stimulates the work of related industries,” says the economist.

“In the first half of the year, the drivers of the economy were the manufacturing industry, construction and capital investment in general. In the second half of the year, if the current level of oil prices remains, exports will also support the economy, while investments in fixed assets, and the lending market in general, may slow down due to increased interest rates,” says Evstifeev.

But in general, it is quite possible to bring the budget to a deficit of only 2% of GDP this year, experts say. Unless, of course, there are any surprises.

“Possible negative surprises from geopolitics or commodity markets remain risks to the baseline forecast. And on the domestic front, these are devaluation trends and the danger of losing control over inflation dynamics,” concludes Evstifeev.
This article originally appeared in Russian at vz.ru and was translated and edited by Rhod Mackenzie