The died The year was a bloody year for Russia’s economy. Foreign investors fled en masse, many never returning. Official forecasts suggest few countries will see theirs bip shrink even more this year. Only a handful of countries, including war-torn Ukraine, will end up posting worse numbers.
From another perspective, however, Russia performed surprisingly well. Financial chaos erupted in the days following the invasion of Ukraine in February Moscow to Vladivostok. After western countries imposed an unprecedented number of sanctions, the stock market collapsed along with the ruble. At that time, Vladimir Putin’s “Fortress Russia” appeared to be crumbling.
Economists quickly revised their forecasts downwards. Within a few days the consensus estimate of annual bip Growth in 2022 fell from 2.5% to a 10% decline. Some economists were even more gloomy: The White House expected Russian to decline every year bip of 15%. Inflation rose across the country.
Russia faced pressures from both the supply and demand sides of the economy. Western companies pulled out by the dozen, limiting Russians’ ability to shop. Meanwhile, the central bank doubled interest rates and increased debt service costs, further dampening demand.
However, within weeks it became clear that the worst forecasts would not come true. sanctions have severely damaged parts of Russia’s industrial base, such as the auto sector that relies on foreign parts. Others, particularly those called upon by the state to help with the war effort, haven’t fared too badly. Economists revised their growth forecasts upwards in the summer and autumn. Now they expect the Russian economy to contract by about 3-4% this year. Unemployment has barely budged, in part because companies have been told to keep workers even if they’re being paid less or no wages at all.
Two main reasons explain why Russia’s downturn has been shallower than expected: politics and trade. In the early days of the invasion, swift action by the central bank and regulators convinced ordinary Russians that they were serious about fighting rising inflation. Inflation expectations fell again after a jump. Higher interest rates encouraged the public to return money withdrawn from their bank accounts in the early days of the Covid-19 pandemic to prevent a financial crisis.
Sanctions were harsh, but restrictions on hydrocarbon sales were few for most of 2022 (that’s changing now). So far this year, Russia has run a current account surplus of over $220 billion, double the previous year’s.
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 become one mediator for western companies that want to avoid sanctions. Russian imports have recovered well after falling sharply in the spring.
“Real-time” economic data paints a worrying picture for the West. The Russian economy is currently in better shape than expected. Meanwhile, Europe, weighed down by sky-high energy costs, slips into recession. ■
