Russia country report - February, 2024

February 1, 2024

The latest revisions to Rosstat data says that Russia ended 2023 with even better growth than the 3.5% expected at 4%. This is almost double the 2.2% expected as late as December.

The military Keynesianism bump to Russia’s economy has been extremely powerful indeed and is a testament to the fact that Russian President Vladimir Putin has pulled out all the stops in his effort to win the war. Ukraine also had a strong year with 5% growth, against the 3% contraction that was predicted at the start of the year.

Other than that, there is not much to report on the war. Ukraine’s counteroffensive failed but Russia has also been unable to make any gains having captured a total of some 40km in the whole year. Both sides are now essentially in defence mode. Putin is waiting for the US elections in November, although analysts are speculating there will be a Russian spring counteroffensive to keep the pressure on. Ukraine is waiting for the West to allocate more money.

But Putin is looking confident as he gets ready for his own presidential election at the end of March.

At home the surprise has been a sudden display of public support across Russia for aspiring presidential candidate Boris Nadezhnin, a liberal critic of the war seen by many as the Kremlin’s preferred liberal spoiler candidate.

However, the long lines of people waiting in sub-zero temperatures to add their signatures to the 100,000 needed for Nadezhdin’s candidacy to move forward may well have alarmed the Kremlin’s electoral cosplay department.

Nadezhdin's campaign has now amassed over 150,000 signatures and remains the opposition’s best hope for anything even resembling a candidate that represents their views since the brief but ill-fated candidacy campaign of Yekaterina Duntsova, who was barred from running. Even the other liberal leaders like jailed opposition blogger and anti-corruption activist Alexei Navalny have called on the population to support Nadezhdin – anyone but Putin, and the hope of denying Putin the 80% of the vote he is hoping for (on a par with his approval ratings).

Nadezhdin has put in his 100,000 signatures needed to qualify and at the time of writing it is possible that he will be barred from running and that may be followed by some large protests, but no one is expecting things to run out of control. While Russians have been excited to have someone to back who is against the war and clearly different from Putin, they remain under-energised. Ironically, Ukraine’s history of protest related chaos is one of the main deterrents for ordinary Russians that have considerably more to lose than their southern cousins.

On the economic front things are going well with historically low unemployment and rising real incomes. The traders have replaced all the goods that went missing at the start of the war and life is pretty normal for most people.

The one bugbear is high inflation, but at 7.42% in 2023 it is not at crippling levels. This is slightly below than the Central Bank’s prediction, which forecasted inflation would rise to 7.6% by the end of the year. However, inflation slowed in December, defying expert expectations and coming down slightly to 7.4% y/y. This may have been due in part to the CBR hiking the key rate for the fifth time in a row on December 15. The Bank increased the rate from 15% to 16% in their continued effort to bring inflation down to the 4% target. The CBR has matters well in hand even if growth will slow and investment will fall.

Both the CBR and the Kremlin remain deeply concerned about inflation’s effect on the upcoming presidential election. Although Deputy Chairman of the CBR Alexey Zabotki said that the Bank will likely maintain tight monetary policy “for a long time,” Putin reassured constituents that the high key rate was a “temporary phenomenon” during a pre-election tour of the regions. Cost of living concerns are of particular interest to the President, who went on to discuss the sudden spike in egg prices and a shortage of chicken meat.

Most of this year will be taken up with fencing over sanctions. The most important change to Russia’ macroeconomic situation over the past twelve months has been the sharp deterioration of its external balance. In 2023, total goods exports reached $423bn, a decline of 29% vs. the previous year, report KSE analysts. This has contributed to much smaller trade turnover in 2023 of $118bn, down by 63% y/y and current account surplus has also fallen from over $200bn in 2022 to only $50bn, a decline of 79%.

As a result of sharply lower inflows of foreign currency, the ruble has lost ~40% of its value against euro and US dollar since the autumn of 2022.

Russia has successfully dodged almost all the sanctions placed on it and, as bne IntelliNews reported, the boomerang effect is hurting Europe more than Russia which will undermine resolve to continue them. But the US is increasingly acting to enforce sanctions on its own. It has targeted Russia’s LNG production, without the support of the EU and added very stringent restrictions on banking and more oil tankers that are having some effect. But Russia appears resilient and even if the sanctions bite deeper they are unlikely to do enough to make the Kremlin change course.

The data shows that widespread violations of the oil price sanctions continue and while the headline current account surplus is down, a large amount of money from the oil trade is not making back to Russia and the national accounts as a slush fund builds up.

Still, going forward, the Russian banking system will likely have to carry more of the burden by buying up domestic debt issuance to fund the official portion of the budget.

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