Russia Country Report July 2023 - July , 2023

July 2, 2023

Russia’s economy is currently growing about 0.6% a quarter, never mind a country that has been hit by over 13,000 sanctions. As sanctions have isolated Russia from the global financial system it is much better protected from external shocks and — barring a catastrophic event — Putin’s prediction is likely to not be far from the mark.
In the first quarter of this year, Russian GDP contracted 1.9% compared with the equivalent period last year. At the same time, seasonally-adjusted disposable income for Russians ticked up 0.1%. This is similar to other periods in the post-Soviet economy (notably in the 2000s and between 2010 and 2013) when citizens grew wealthier at a faster rate than the economy. Russia’s economy is enjoying a military-driven Keynesian bump.
Military spending is one of the main expenses for Russia this year. Expenditure on “national defence” and “national security” is set to exceed 9 trillion rubles (6.2% of GDP), almost a third of total spending. Even so, this is not much for a country at war: at the height of the Vietnam War, US military spending was 9.7% of total spending, during the most expensive period of the arms race in the mid-80s it hit 6.8% and, during military operations in Iraq and Afghanistan, it was at roughly the level we see in today’s Russia.
The money Russia has earmarked for this year is being spent extremely rapidly: in the first five months of the year, almost 60% of defence spending and almost 40% of security spending had already been carried out (this data comes from open sources — but on Wednesday the Finance Ministry announced it was ceasing publication of such information). In addition, there is a huge amount of construction underway in the Russian-occupied areas of Ukraine, which is all heavily subsidized. As much as 88% of the spending by the Russian-installed administrations in the four Ukrainian regions annexed by Russia last year is from Moscow, according to Ilya Tsypkin, an expert at Russian credit rating group ACRA.
The defence sector has grown 25% between January and April, according to a recent Rosstat report.
As well as supporting the economy, rising military expenditure also increases incomes. Official figures show that real incomes are rising fastest in regions with significant military industries, or from where there are large numbers of soldiers (Buryatia, Chechnya, the Jewish Autonomous Region, etc).
Average incomes in the last quarter of 2022 grew faster among the poor — the higher the income bracket, the slower the salary increases have been.
Russian President Vladimir Putin has no doubt that in the coming years Russia will retain the sixth place in the world in terms of gross domestic product, calculated at purchasing power parity.
"There is no doubt that in the coming years we will retain this sixth place, if we count GDP at purchasing power parity. <…> Now, indeed, Russia ranks sixth in the world in terms of economic size at purchasing power parity. I spoke about macroeconomic stability, about how the economic situation is developing now and how we forecast it. I have no doubt that we will certainly secure this sixth place," Putin stressed.
Putin confirming plans to raise Russia’s minimum monthly wage by 18.5% in 2024, and proposing that child benefits and the unified child allowance be paid to parents during the entire period for which they are designated, even if the recipient’s income rises.
Putin specifically emphasized that Russia "is getting off the oil needle" and that this trend was gaining momentum. In addition, the president proposed an amnesty for businesses for currency violations they were compelled to commit by changing circumstances.
The exit of foreign companies from Russia has opened up some RUB2 trillion ($23.8bn) worth of niches, Russian President Vladimir Putin said, addressing a plenary meeting of the St. Petersburg International Economic Forum (SPIEF) on Friday.
"Foreigners have largely vacated up to 2mn square metres of retail space and a niche worth about RUB2 trillion ($23.8bn)," he said.
According to the Russian leader, lots of foreign businesses manufactured their products locally, therefore their departure from the Russian market has not affected output. "What has changed is the logo. Meanwhile, revenues from these businesses stay in our country," the Russian leader maintained.
"Our overall exports last year broke the ten-year record and reached $592bn dollars and non-raw material, non-energy exports accounted for nearly one third of this sum - $188bn. This figure means 6.4mn jobs and RUB2.2 trillion (over $26bn) in tax revenue to the country’s consolidated budgets," Putin said at SPIEF on June 16.
The latest data suggest that this strength continued at the start of Q2. With Urals crude oil prices stabilising after the sharp falls late last year, imminent risks to macroeconomic stability have eased and the economic recovery is likely to continue in the coming months.
The CBR does not see signs of overheating of the Russian economy, but such risks exist and it is necessary to pay attention to it, Elvira Nabiullina, head of the regulator, said at a press conference following a meeting of the regulator's board of directors. "Overheating is the situation when GDP is above its potential, and in the event that demand grows faster than supply, when GDP has reached its potential. Inflation serves as an indicator of such overheating, when it rises above a key level. Now we do not see it, we cannot say that the economy is now overheated, but the risks of such overheating exist, and we need to pay attention to it," she said.
However, the current capacity to expand production in the Russian economy is increasingly limited by labour market conditions. Unemployment has dropped to a new historical low. Labour shortages are increasing in many industries amid the effects of the partial mobilisation as growth in businesses’ demand for labour continues. In these circumstances, productivity growth can lag behind real wage growth said the CBR.
Sanctions on Russia are not working well. In the beginning of this year, the Ministry of Defence of Ukraine published figures estimating that Russia was down to 19% of its pre-invasion long-range strategic missile capabilities. These estimates, however, were recently re-evaluated by the Ukrainian authorities following Russia’s continuous attacks on Ukrainian cities in May and June. The Kyiv Independent reports that now, Kyiv foresees Russia doubling its production of long-range high-precision missiles in 2023, with a projected total of 1,061 missiles—enough to fire almost 90 per month for the next year.

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