In 2022 Russia held the economic exhibition on the road
The passed The Russian economy has been struggling for a year. Foreign investors fled in droves, many never to return. Official forecasts indicate that many countries do not see them GDP a bigger decline this year. Only a handful of countries, including war-torn Ukraine, post worse numbers.
From another perspective, however, Russia did remarkably well. In the days following the invasion of Ukraine in February, there was financial chaos from Moscow to Vladivostok. After Western countries imposed an unprecedented number of sanctions, the stock market collapsed along with the ruble. At the time it seemed that Vladimir Putin’s “Fortress Russia” was crumbling.
Economists quickly downgraded their forecasts. Within days of the consensus estimate of annual GDP growth in 2022 fell from 2.5% to a contraction of 10%. Some economists were even worse: The White House was looking for a year-over-year decline in Russia GDP of 15%. Inflation soared across the country.
Russia faced pressure on both the supply and demand side of the economy. Western businesses were pulling out by the dozen, limiting what Russians could buy. At the same time the central bank doubled interest rates, increasing debt servicing costs and thus squeezing demand.
Within a few weeks, however, it became clear that the worst predictions were not going to come true. Sanctions have severely damaged parts of Russia’s industrial base, such as the auto sector, which rely on foreign parts. Others, especially those involved with the state to help with the war effort, did not do too badly. During the summer and autumn economists revised their growth forecasts. Now they expect the Russian economy to shrink by around 3-4% this year. Unemployment has barely decreased, in part because companies have been told to keep workers, even if they are on lower wages or unpaid wages.
Two main reasons explain why Russia’s recession has been shallower than expected: policy and trade. In the early days of the invasion, quick actions by the central bank and regulators convinced ordinary Russians that they were indeed dealing with hyperinflation. Inflation expectations, after jumping, came back down again. Higher interest rates encouraged the public to return money they took out of their bank accounts in the early days of the covid-19 pandemic, preventing a financial crisis.
Sanctions have been difficult, but for most of 2022 there were few restrictions on the sale of hydrocarbons (that is now changing). So far this year, Russia has accumulated a current account surplus of more than $220bn, twice the level of the previous year.
This foreign currency has helped finance imports. Many Western companies have stopped selling their goods and services to Russia. But companies in other parts of the world are only too happy to help – China, for example, has stepped up. Turkey seems to have stepped in between Western companies looking to avoid sanctions. Russian imports have recovered well after a sharp fall in the spring.
“Real-time” economic data paints a worrying picture for the West. At the moment, the Russian economy is in better shape than expected. Meanwhile Europe, weighed down by sky-high energy costs, is falling into recession. ■