Russia country report - March, 2024

March 1, 2024

Russia's economic growth accelerated in January 2024, expanding by 4.6% y/y, up from a 4.4% increase in December, according to the Russian Ministry of Economic Development.

Both industrial production increased to 4.6% from 2.7% in December and the manufacturing PMI surged to 54.7 points – the strongest in Europe and Russia’s best result for 13 years. Retail sales growth slowed from 10.2% y/y in December to 9.1% in January. Most figures came in stronger than expected.

The military Keynesianism of the war spending is keeping the Russian economy running hot, wages high, unemployment low and is churning out plenty of weapons and shells to keep Putin’s forces on the battlefield well supplied.

In seasonally-adjusted terms, Rosstat reported a 0.7% m/m rise in industry – the largest monthly increase since May – and we estimate that retail sales expanded by 1.0% m/m. The pick-up in industrial production follows a period of stagnation since mid-2023 and suggests to us that order books have been boosted by a rise in government spending (particularly in military-focused manufacturing).

Looking forward, the Ministry of Economic Development forecasts a 2.3% growth in the Russian GDP for the entirety of 2024. Meanwhile, the Bank of Russia has a more conservative outlook, projecting a growth range of 0.5-1.5%.

The war is not going well for Ukraine, which after a four-month fight, lost control of Avdiivka on February 17, giving Russia’s forces the
initiative. Ukraine is running out of weapons after the US ran out of money for Ukraine in January and Europe has been scrambling to find
more as the possibility of a military collapse of the Armed Forces of Ukraine
(AFU) has become a real possibility.

The West imposed a fresh round of sanctions on the anniversary of the second year of the start of the war, but they remain almost entirely toothless – little more than a new list of names – as Europe increasingly feels the pain of sanctions bouncing back. Several more EU countries followed Germany into recession, whereas the growth rate of the Russian economy in 2023 turned out to be above the global average and Russia is now the fastest growing major economy in the world.

The architects of the sanctions overestimated Russia’s dependence on external financing and underestimated Russian exports, according to the Sberbank Financial Analytics Centre.

In a number of cases Western sanctions had the opposite effect, and were beneficial to Russia’s economy, Sberbank said giving several examples: the voluntary or forced withdrawal of Western companies from Russia provided an incentive for the growth of domestic production; the establishment of parallel imports and the import of alternative products from third countries has been highly successful; restrictions on the withdrawal of capital has trapped more cash in the country and supported the ruble; and the persecution of Russian business in the West has led to repatriation of a lot of Russian capital from abroad.

It’s becoming increasingly clear that Russia’s large current account surplus and low external debt (18.7% GDP) has very effectively sanction-proofed the economy. At the same time, the West has underestimated how deeply Russia is integrated in the global economy and how dependent Europe in general has become on Russian inputs.

Nevertheless, sanctions are not without their effect. Russian
exports fell almost 30% in a year, and US sanctions have blocked their tanker
fleet. OFAC is increasingly introducing smart sanctions that are designed to wound specific parts of the
Russian economy, in particular its energy and banking sectors, which are having
some effect. In particular, US sanctions on Russian ships means that India has
started to refuse docking for these tankers and is being forced to look
elsewhere such as the Kingdom of Saudi Arabia (KSA) for oil supplies. This is
probably a temporary problem caused by the game of whack-a-mole in play and Russian traders will find some
intermediary to provide Indian refineries with a fire break.

The total volume of Russian exports decreased by 28.3% to $425.1bn. The most noticeable drop was in European supplies, which was by 68% to $84.9bn. On the other hand, exports to Asia increased by 5.6% to $306.6bn. This region’s share of Russian exports has increased significantly - from 49% in 2022 to 72% in 2023.

In parallel with this is the rise of the use of national currencies to settle mutual trade with Russia’s partners which now makes up 75% of all transactions.

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