KSE: Russia’s macroeconomic situation shows signs of improvement, sanctions need to be tightened
KSE Institute released its October Russia Chartbook, “Macroeconomic Situation Shows Signs of Improvement, Sanctions Need to Be Tightened” providing an overview of Russia’s economy, foreign trade, fiscal and monetary policies.
“The effectiveness and credibility of energy sanctions [on Russia are] on the line. The key mechanism through which embargoes on Russian oil and the G7/EU price cap regime have weighed on export earnings and budget revenues – the discount on Russian supplies vs. global prices – is showing signs of trouble,” says KSE. “For Urals grade crude oil, for instance, it declined from $40 per barrel in January to below $14 per barrel in September. Reduced volumes play a role but so does Russia’s growing ability to rely on a sanctions-proof fleet of vessels. These issues need to be addressed urgently to maintain pressure on Russia and ensure that the sanctions regime remains credible.”
1023 Russia OOTT shrinking discounts threaten key mechanism of energy sanctions KSE
KSE stresses that the Russian economy is recovering after the initial shock caused by the war and sanctions.
“It is critical, therefore, to strengthen sanctions, especially in the energy sector – to reduce access to foreign currency and Russia’s ability to increase military spending,” KSE said in the report.
“To safeguard the credibility of the sanctions policy, immediate action must be taken to address the issue of price cap compliance. Furthermore, the key mechanism through which oil sanctions work – the discount of Russian exports vs. global prices – is under threat," KSE said.
In September 2023, Russian oil export earnings reached $18.8bn, the highest since July 2022, and the current account surplus in the third quarter rose to $16.6bn (compared with $9.6bn in the second quarter of 2023).
“Should foreign exchange inflows rebound further and budget revenues continue to rise, the Kremlin will be able to pursue a more flexible monetary and fiscal policy in the face of war and sanctions,” KSE said.
While a 50% drop in the ruble’s value since last autumn is indicative of a less supportive external environment, it helped to reduce the federal budget deficit to RUB1.7 trillion during January-September this year, which is broadly in line with the original target.
“This improvement will enable the Kremlin to significantly increase defence spending next year – by 68% growth vs. the estimated 2023 outturn,” KSE said.
Overall, the Russian economy is gradually recovering. According to Russia’s central bank, the International Monetary Fund (IMF) and the World Bank, Russia’s real GDP is projected to increase by 1.6-2.2% this year. In 2024, growth is expected to reach 1-1.5%. However, the recovery of business activity may be hampered if the ruble depreciates further, prompting the CBR to raise interest rates again.
The Kyiv School of Economics (KSE) is a bne IntelliNews media partner and a leading source of economic analysis and information on Ukraine. This content originally appeared on the KSE website.
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