Russia country report - November, 2023

November 1, 2023

Russian President Vladimir Putin says the Russian economy is performing "better than previously expected" but some economists say it is actually overheating.

Despite a tight labour market and persistent inflation, Russia's GDP is set to grow by 2.2% this year, according to the International Monetary Fund (IMF), a rate three times faster than the expected growth in the eurozone, and well ahead of the IMF’s prediction of 0.7% at the start of this year, which was itself considered optimistic at the time.

This unexpected economic boom is primarily due to the massive increase in government spending – a departure from Russia's historical fiscal austerity.

The defence budget has surged to 3.9% of GDP this year, up from 2.7% in 2021, prior to the invasion of Ukraine. It is slated to increase by over 70% in 2024, reaching approximately 6% of GDP. These figures may be conservative as various forms of war spending are concealed within other sections of the budget.

The emphasis on military priorities has strained the labour market by mobilising human resources, contributing to a historically low unemployment rate of 3% in August. Over 300,000 Russian men have been enlisted for the war, causing labour shortages especially in industries unrelated to the conflict.

And Russia has successfully dodged sanctions, providing some economic relief. The oil sanctions in particular are a spent cannon. The rise in oil prices, up nearly 60% since March to around $90 per barrel, has bolstered the economy and government revenue. Putin has revised the budget deficit estimate to just 1% of GDP for this year down from the previous estimates of 2%, thanks to increased oil and gas taxes.

However, the Russian economy faces potential threats in the medium term. The emigration of skilled workers following the Ukraine invasion is causing a talent drain, impacting future growth potential. The weakening ruble, down 30% since January, and high inflation rates, reaching 6% annually, could further destabilise the economy. Russia's growing financial dependence on China, its largest trading partner, poses another risk.

The IMF anticipates a significant slowdown in GDP growth to 1.1% next year, although the CBR is much more optimistic. Putin may face tough spending decisions next year as he seeks re-election in 2024.



The Central Bank of Russia (CBR) monthly macroeconomic survey that polls economists and analysts from major investment firms has revealed a further deterioration in their forecasts for Russia’s key economic indicators in 2023. These projections suggest that economic challenges will persist, with little respite on the horizon.

According to the economists' collective insights, the US dollar is anticipated to remain within the range of 94 to 98 rubles over the next three years. Additionally, year-end inflation for 2023 is expected to reach 7%, and the Central Bank's key rate is projected to climb to 15% by year-end. analysts also foresee that labour market tensions will persist through at least 2026.

Furthermore, the forecast for the ruble's exchange rate has also deteriorated. The average forecast for 2023 suggests an exchange rate of 96 rubles per US dollar for October-December (currently at 97). In 2024, analysts expect the rate to be 94 rubles per dollar (compared to the previous forecast of 89.9), 97.5 in 2025 (previously 90.8), and 98.2 in 2026 (previously 92).

The war in Ukraine grinds on with neither side gaining any significant territory. However, the arrive of new long range missiles means that Russia is losing the battle for the Black Sea and has been forced to withdraw its navy from its home post and move it to Georgia. That has allowed Ukraine to reopen a temporary grain export corridor with limited capacity; while grain production is up year-on-year, grain export in this marketing season is down by a third as of the end of September.

Russia continues to fight a largely defensive war, while Armed Forces of Ukraine (AFU) is on the offense, but at the cost of high casualties. However, as Putin has now put Russia’s economy on a full war footing the plan seems to be to keep the pressure on Ukraine for another year and wait for the US elections which could deliver Donald Trump back to the White House. No ceasefire talks are expected before November next year as a result.

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