What will the Russian economy do in 2024?
By Rhod Mackenzie
In 2023, the Russian economy coped with such external challenges that no other country in the world has ever faced. In the new year, solving more internal economic problems will come to the fore. Will Russia be able to defeat inflation and increase budget revenues? Here we list a number of predictions by leading Russian economists about what they expect.
In the second half of the past year, it was not possible to avoid overheating of the Russian economy (GDP grew above 5%), however, the efforts of the Central Bank and the government will be delayed, but will be reflected in GDP. “Already in the first quarter of 2024, economic growth will slow down sharply from the high base of 2023 due to monetary tightening (taking into account the rate increase to 16% in December) and a reduction in fiscal impulse,” according to analysts at BCS World of Investments. For example, VEB forecasts GDP growth of 1.1% in 2024 versus 3.5% in 2023.
“However, from the point of view of the vector of the Russian economy, 2024 will be no worse than the previous one. Economic growth will continue. Real incomes of the population will continue to grow. Inflation will decrease: if in 2022 it was 11.8%, then in 2023 it dropped to 7.5%, and in 2024 the Central Bank expects inflation of 4-4.5%,” says Alexander Abramov, head of the analysis laboratory institutions and financial markets of the Institute of Applied Economic Research, RANEPA.
“The main economic growth in 2024 will presumably be associated with the active investment policy of the Russian government. Foreign investment disappeared along with foreign investors. The state invests in long-term projects that have a lasting and large-scale effect - transport infrastructure, regional industrial clusters, production of innovative products. Significant attention is paid to improving social infrastructure and creating more attractive conditions for living and working in the regions, especially in Siberia, where many large industries are located,” notes Mikhail Gordienko, Associate Professor of the Department of Finance for Sustainable Development of the Russian Economic University.
In 2024, the manufacturing industry is expected to continue growing, primarily due to high levels of budget expenditure to support the SVO. Construction is expected to slow down as the government takes measures to prevent a potential 'bubble' in the real estate market. Agriculture is expected to remain a source of growth.
Additionally, demand from the population will continue to drive growth, with large social payments expected to be funded by the budget. Alexander Abramov from RANEPA suggests that stimulating various sectors of the economy at the expense of the budget will be more challenging next year due to the noticeable decrease in budget spending on the economy. Growth will depend significantly on the behaviour of private investors.
Gordienko identifies three areas that will help the Russian economy in 2024. Firstly, traditional mining and manufacturing industries will play a crucial role in the growth of the Russian economy. It is important to note that the growth of the Russian economy will rely on these areas. Secondly, the completion and commissioning of large infrastructure projects such as M-12 will be essential for transport and logistics infrastructure. Thirdly, to achieve import substitution, the speed of which will depend on market changes and investment activity, special economic zones, individual regional development programs, infrastructure budget loans, and new public-private partnership agreements can be utilized,” argues Mikhail Gordienko.
Despite the slowdown in economic growth and inflation, experts anticipate a reduction in the Central Bank's key rate, although this is unlikely to occur immediately. BCS World of Investments analysts predict that the Central Bank's key rate will remain at 16% in Q1 2024 but decrease to 10% by year-end. They estimate that inflation will slow to 5% YoY.
Experts anticipate greater ruble stability. Abramov expects the average annual rate to remain at 95 rubles per dollar. BCS World of Investments predicts that the average ruble exchange rate in 2024 will be 86.6 per dollar, slightly worse than the level in 2023. However, analysts believe that volatility will decrease significantly. The mandatory sale of foreign currency earnings will provide additional support for the ruble.
The Russian budget for 2024 shows a sharp increase in both expenses (by 20%) and revenues (by 22%) compared to 2023.
Alexander Abramov suggests that the financial stability of the Russian economy will depend largely on the Ministry of Finance's ability to balance the budget. Budget execution at BCS World of Investments is considered a significant risk in 2024.
Regarding spending, the focus is on developing civil industries such as aircraft and auto manufacturing, as well as creating a microelectronics industry and advancing unmanned technologies and artificial intelligence, according to Gordienko.
However, the main concern is how the authorities plan to increase revenue. Despite the increase in expenses and revenue, the budget deficit is expected to decrease to 0.9%, compared to 1.1% last year. Simultaneously, the authorities do not intend to utilise funds from the National Welfare Fund to balance the budget. Instead, they plan to increase borrowing on the domestic market to 2.6 trillion rubles, up from 1.8 trillion rubles last year.
Additionally, they aim to increase tax collection and may incur new debt obligations. The Ministry of Finance anticipates a rise in the collection of turnover taxes, including taxes on profits, personal income, and VAT. The share of these taxes in GDP is expected to increase. Analysts at BCS World of Investments note that there is a predicted sharp increase in oil and gas revenues, which may not be realised if prices fall and the ruble strengthens.
The budget assumes an increase in one-time fees, some of which are known, such as income from new export duties and deferred payments to the social fund. However, the Ministry of Finance plans to collect about 0.9 trillion rubles from yet unspecified sources, as indicated by analysts at BCS World of Investments. Therefore, they are waiting for new one-time tax levies. This could be achieved through adjustments in oil and gas tax rates for individual companies or increased dividend payments from state-owned companies.
Gordienko predicts a potential decrease in hydrocarbon production and exports in 2024 due to limited global market access, the green agenda, and decreased consumption. This could result in a reduction of oil and gas budget revenues.
Gordienko predicts a potential decrease in hydrocarbon production and exports in 2024 due to limited global market access, the green agenda, and decreased consumption. There is also a possibility of lower oil prices next year.
Furthermore, geopolitical tensions and the risk of sanctions remain. The West may introduce new sanctions or strengthen control over existing ones. BCS World of Investments analysts have warned that a lower oil price ceiling and new embargoes on Russian exports could significantly distort the foreign trade balance. This could result in a decrease in export revenues and a reduction in imports if border-friendly countries tighten control over re-export operations. The analysts have also identified potential internal risks, such as an increase in political turbulence leading up to the elections and the escalation of the Ukrainian conflict.
However, Olga Belenkaya, head of the macroeconomic analysis department at the Financial Group Finam, believes that the Russian economy has extensive experience in dealing with risks. Therefore, any potential 'black swans' in 2024 may be caused by internal factors rather than external ones.
The Central Bank of Russia has developed various scenarios for the situation's development. The worst-case scenario involves a significant decrease in the current account, a depreciation of the ruble, and high inflation. The regulator will address this by raising the key rate even further. According to Belenkaya, in a risky scenario, the country's economy could experience a recession lasting up to two years. However, this outcome is deemed improbable.
