What is hidden behind the IMF's faith in the growth of the Russian economy?

By Rhod Mackenzie

The International Monetary Fund has revised its growth forecast for the Russian economy in 2024, more than doubling its previous estimate from 1.1% to 2.6%. This marks a significant increase in optimism compared to last year's forecast. The IMF forecast shows that the Russian economy is expected to grow by 1.5%, which is the highest among the other economies mentioned.

Even the Russian authorities' own forecasts are less optimistic than the Western fund's projections. For instance, the Bank of Russia expects economic growth to be only between 0.5% and 1.5% this year. Meanwhile, the Ministry of Economy is more optimistic and predicts a GDP growth of 2.3% this year.

Even the press secretary of the Russian President, Dmitry Peskov, commented on the disparity in forecasts. 'This is very interesting information. The spread in the forecasts is significant, suggesting that the forecasting potential is relatively narrow, which is probably why there are such different points of view. However, it is not without interest,' he said.
Last year, the IMF made pessimistic forecasts regarding the Russian economy. However, over the course of the year, the Fund had to revise its expectations towards growth and acknowledge that sanctions were not effective. The Russian economy was coping well with them. Even the IMF's final forecast of 3% growth for the year is unlikely to be achieved. The calculation of Russia's GDP growth for 2023 will be completed by mid-February. In December, Vladimir Putin spoke about growth expectations of 3.5-4%.

The IMF's unexpectedly high forecast for the new year was somewhat alarming. Is the IMF intentionally raising expectations so that they can lower the forecast during the year and highlight that the Russian economy is struggling?

The IMF attributes this forecast to two factors: high government spending on the 'war economy' and stable prices for raw materials, which enable Russia to earn high income from exports. the IMF chief economist Pierre-Olivier Gourincha stated in an interview with the Financial Times that the Russian economy is performing better than anticipated by many.
Ilyas Zaripov, an Associate Professor at the Department of Global Financial Markets and Fintech at the Russian Economic University, explains that the IMF considers the production of all goods and services. Russia's production of weapons and military and dual-use goods has led to growth in related industries such as metallurgy, mining, electric power, textile production, footwear industry, manufacturing electronic goods, and the agro-industrial complex. The military-industrial complex has become the driver of growth, propelling other sectors of Russian industry forward like a locomotive.

IMF experts based their analysis on a positive scenario for the Russian economy, which includes the explosive growth of military-industrial complex production in 2023. Zaripov argues that the opinion that the forecast is overestimated is incorrect. He believes that the growth rates of the Russian economy may even exceed 3% in 2024. Russian agencies are more conservative in their forecasts due to the consideration of other factors, such as the monetary policy of the Bank of Russia. Additionally, Russian departments typically plan for lower GDP growth, but in reality, it is higher.
However, Russian economists hold differing opinions. Ilya Fedorov, Chief Economist at BCS World of Investments, believes that the IMF has taken a bold step by more than doubling its forecast for Russian GDP growth. Achieving such a high result at the end of the year will not be easy, given limited resources, especially in the labor market, and high real rates. This is even taking into account the serious fiscal impulse included in this year's budget. However, given the high base from last year and the current state of economic overheating, the only viable source of growth in this situation is through budget expenditures. Private consumption will be limited by high interest rates and export opportunities will be constrained. If the IMF shares this perspective on the Russian economy, a rapid reduction in the key rate should not be anticipated. According to Fedorov, if this scenario plays out, the expected key rate reduction cycle in the middle of the year may be delayed by a quarter or even two quarters.

Natalya Milchakova, a leading analyst at Freedom Finance Global, views the IMF's forecast as less optimistic than forecasts for other economies. The IMF predicts that the Russian economy will grow by 2.6% in 2024. While this is comparable to the expected growth rate of the world economy and slightly higher than the projected growth rate of US GDP (2.5%), it is significantly lower than the estimated growth rates of China (5%) and India (6.7%), and even lower than the average growth rate of the Asian economy (above 4%). This forecast indicates that Russia remains dependent on commodity prices and partly on the 'price ceiling' for oil. Although indirect, this still impacts consumer demand. The IMF expects the average price of oil to decline compared to the previous year. Milchakova stated, 'Happy 2023.'

However, the IMF has acknowledged that it underestimated the impact of state defense orders and the growth in effective demand from the population on Russia's economic growth in 2023.
In our opinion, the IMF still overlooks certain factors. For instance, it fails to consider the impact of national projects.

However, in 2019, the World Bank predicted that national projects in Russia could increase the annual growth rate of Russian GDP by at least 0.1%. The IMF does not consider the impact of import substitution, which the Russian Federation is rapidly developing after the departure of foreign brands. The government is investing in the IT sector and strategically important industries, as well as developing the Runet economy, where the service sector is experiencing the highest growth rates," says Milchakova. Therefore, Milchakova does not rule out the possibility of the IMF revising its forecast for the Russian economy in 2024 at a later time, perhaps in six months.

Russian departments have not updated their 2024 forecasts in a while, likely waiting for official Rosstat data on 2023 GDP growth, which will be released in mid-February. Milchakova believes that these forecasts will inevitably be adjusted upward when they are released.
However, the Central Bank of the Russian Federation may remain the most conservative as it places great importance on the impact of increasing the key rate and bank interest rates on loans on economic growth. These factors may result in slower growth for the Russian economy in 2024 compared to 2023. Sanctions and the possibility of a collapse in oil prices remain significant risks for the Russian economy, according to the economist. A sharp drop in oil prices could deal a severe blow to the Russian economy.