‘The Economist’: Russia’s economy once again defies the doomsayers

Russia’s economy has repeatedly defied the doomsayers. A financial collapse, widely predicted in the spring of 2022, never came to pass. The economy fell into recession, but it was less severe than expected and did not last long. Inflation was the most recent scare, notes ‘The Economist’ from London with a bit of surprise.

Last year prices accelerated rapidly; economists believed they could spiral out of control. However, the Russian economy appears to be proving the pessimists wrong. Data to be published on March 13th are expected to show that prices rose by 0.6% month-on-month in February, down from 1.1% at the end of last year. On a year-on-year basis inflation is probably no longer rising, having hit 7.5% in November. Many forecasters expect the rate to fall to just 4% before long, and households’ expectations of future inflation have flattened. The result of Russia’s presidential election, which begins on March 15th, is a foregone conclusion.

Russian inflation surged last year owing to a fiscal splurge larger than the one implemented during the covid-19 pandemic. Total government outlays rose by 8% in real terms. By October last year nominal wages were growing at an annual pace of 18%, up from 11% at the start of the year.

Russia still seems to be heading for a “soft landing”, in which inflation slows without crushing the economy. The performance of the economy is now in line with its pre-invasion trend; gdp grew in real terms by more than 3% last year (see chart 2). Unemployment remains at a record low. And there is little evidence of corporate distress; indeed, the rate of business closures recently hit an eight-year low. The Moscow Exchange is hoping to see more than 20 initial public offerings this year, up from nine last year. The latest “real-time” data on economic activity are reasonably strong. Consensus forecasts for gdp growth this year of 1.7% look too pessimistic.

Russia’s economic resilience is in part the consequence of past stimulus. In recent years corporations and households have built up large cash balances, allowing them to continue spending even in the face of high inflation, and avoid default in the face of high borrowing costs.

Sanctions-busting has also juiced the economy. Russian production facilities formerly owned by Westerners have reopened under new management, points out the central bank in a recent report. At the start of the war, sanctions made it hard for Russian firms to source inputs, delaying production. Now, though, companies have set up durable supply chains with “friendly” countries. Well over half of goods imports come from China.

As new trading relationships have bedded in, Russian exporters have dared to raise prices, supporting revenues and profits. The discount on oil Russia offers to Chinese customers, for instance, has fallen from more than 10% in early 2022 to about 5% today. And it is not just oil.

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