Category: Macro Monthly

Protection of Stability Gets More Challenging. Data for September and anecdotal evidence for October show a sharp deterioration in the speed of the post-Covid and post-sanctions recovery in the Russian economy. As the population turns to savings mode, domestic businesses have shelved expansion plans while foreign companies continue to exit Russia.

The Russian economy remains in a fragile balance after the slide posted in 2Q22. On one hand, the domestic output is supported by strong energy prices, rising government expenditures, especially in the defense sphere, a good harvest, and the improved stability of prices and the financial areas, not least because of the surprisingly resilient ruble exchange rate.

Better-than-expected 2Q22 GDP data along with signs of further macro stabilization in July mean that contraction of the economy will likely be much smaller than initially forecast. On the other hand, the long-term effects of many sanctions should not be ignored – these mean that recovery to sustainable growth rates might prove to be more difficult and lengthier.

On July 29th the Economy Minister said that the performance of the Russian economy was much better than forecast in the spring. However, we note that the negative macro trends are gradually becoming stronger while reports from companies and the actions of politicians lead us to believe that 2H22 and, probably, 2023 will be far more challenging than the immediate post-sanctions period of 2Q22.

Economy: A Mix of Strength and Weakness. In 5M22 the economy was still up in YoY terms (by a symbolic 0.5%). The  resilience to crisis trends is an undeniable demonstration of Russia’s strength. But a few key indicators in industry, consumption, investment, and external trade signal growing weakness.

April was the first month the Russian economy faced the full consequences of the changes to its macro environment. Surprisingly, the data suggests that the effects of the crisis are much milder than expected. This, however, does not mean that the crisis will be softer; rather it means that it will be more gradual and protracted.

March macro data has shown signs of growing weakness in the Russian economy but the YoY contraction in GDP will likely come only in April or May. At the same time, continued appreciation of the ruble will force the CBR to take earlier steps aimed at liberalization of the FX market and a partial removal of capital controls.

The economy remains in a relatively stable condition, although it becomes hard to disregard evidence from various sources that shows a rapid accumulation of problems. The two key problems are in logistics and sanctions-related disruptions to the supply chains of various goods and components.

When we published our last monthly macro update, Russia’s economic prospects were very different from what reality tells us now. The military conflict between Russia and Ukraine has triggered an unprecedently strong and quick reaction from the West. In the two weeks that have passed since the conflict began, Russia’s standing in the global economy has changed from an integrated and important player to a pariah state.

Talk of a Russia-Ukraine war and the threat of new sweeping sanctions from the West has led to a significant cooling of the domestic market and pushed the ruble to the lower edge of its trading band.