Russia's economy defies doomsayers again

I amn two In the years since Vladimir Putin invaded Ukraine, Russia's economy has repeatedly defied doomsayers. The widely predicted fiscal collapse of spring 2022 never materialized. The economy fell into recession, but it was less than expected and did not last long. Inflation was the most recent fear. Prices rose rapidly last year; Economists believed they could spiral out of control. Even Mr Putin was concerned. In February, he urged officials to pay „special attention” to rising prices.

However, the Russian economy appears to be proving the pessimists wrong once again. Data to be released on March 13 is expected to show a month-on-month increase of 0.6% in February, up from 1.1% at the end of last year. Inflation on a year-on-year basis stood at 7.5% in November and is no longer rising (see Chart 1). Many forecasters expect the rate to drop to just 4% before long, and households' expectations of future inflation have flattened. The results of the Russian presidential election, which begins on March 15, were closed early. If it is competitive, these figures will do Mr Putin no harm.

Image: Economist

Russian inflation rose last year due to greater fiscal stimulus than was implemented during the Covid-19 pandemic. Mr Putin has doubled down on his invasion of Ukraine, increasing spending on everything from transport equipment and weapons to soldiers' salaries. Total government expenditure increased by 8% in real terms. Demand for goods and services rose beyond the economy's ability to supply them, leading sellers to raise prices. As hundreds of thousands were conscripted and tens of thousands left the country, labor became increasingly difficult to find. In October last year, nominal wages grew at an annual pace of 18%, up from 11% at the start of the year. This spurred price increases in labor-intensive services such as health care and hospitality.

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Who is eligible for conversion? The Finance Ministry is taking forward its demand. Last year, its officials successfully lobbied for exchange-rate controls that forced exporters to deposit foreign currency in the Russian financial system. The visa may have supported the ruble, which has appreciated in recent months, reducing the cost of imports.

Central bankers think their counterparts in the finance ministry are so lacking in economic savvy that they confuse markets at their peril. They believe their policy of doubling interest rates from July 2023 should take credit for the slowdown in inflation, and they may be right. High rates have encouraged Russians to put money into savings accounts rather than spend it. Tighter monetary policy has also constrained lending. Retail lending rose 0.6% month-on-month in December, up from 2% for most of 2023.

Image: Economist

Some other central banks were hawkish. Yet Russia is still headed for a „soft landing,” in which inflation eases without crushing the economy. Efficiency of the economy Now in line with pre-invasion trends; GDP It grew by more than 3% in real terms last year (see Chart 2). Unemployment is very low. There is little evidence of corporate distress; In fact, the rate of business closings recently hit an eight-year low. The Moscow exchange expects to see more than 20 initial public offerings this year, up from nine last year. Recent „real-time” data on economic activity have been reasonably robust. Consensus predictions GDP 1.7% growth this year is very pessimistic.

Russia's economic slowdown is part of the past stimulus. Corporations and households have built up more cash reserves in recent years, allowing them to continue spending in the face of high inflation and avoid defaults in the face of higher borrowing costs. As in other parts of the world, a decrease in demand for workers results in a decrease in unfilled vacancies rather than a lower number of people in employment. Statistics from recruitment site HeadHunter suggest that the rate of open positions for job seekers has stopped rising. Having struggled to find workers in recent months, employers are reluctant to let people go unnecessarily.

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Sanctions have sapped the economy of destruction. Western-owned Russian manufacturing facilities have reopened under new management, the central bank indicated in a recent statement. At the beginning of the war, sanctions made it difficult for Russian companies to supply inputs, and production was delayed. Now, companies have established sustainable supply chains with „friendly” countries. More than half of goods imports come from China, more than double the share before the invasion.

As new trade relations take hold, Russian exporters are bracing to raise prices, supporting revenues and profits. For example, Russia's discount on oil to Chinese customers has fallen from more than 10% in early 2022 to 5% today. And it's not just oil. Mr Putin is proud of his ice cream exports to China, noting last week that he „treated my friend President Xi Jinping”.

As every Russian knows, inflation has never been defeated. Central bank officials continue to worry that inflation expectations are too high. The biggest concern is that the ruble could fall if lower oil prices, another round of tougher sanctions or China loses interest in supporting Mr Putin. These are serious concerns. Nevertheless, the world's massive economy is back on track.

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