Russian Country Report Apr23 - April, 2023

April 2, 2023

There is little sign of an economic improvement despite the surprisingly robust
year Russia put in in 2022 in the face of ten rounds of extreme sanction
imposed following Russia’s invasion of Ukraine over a year ago, says the Bank
of Finland institute for Emerging Economies (BOFIT) in its weekly update.

Russia’s industrial output contracted by 2% Y/y in January-February. Mining &
quarrying production fell by 3.1%, with the most notable drops in output of coal
(down by 2.3%) and natural gas (-13.5%). Oil production fell only slightly
(-0.6%). The decline in manufacturing output continued with the volume of
production in January-February down by 1.7% Y/y, according to the latest
Rosstat data releases this week.

But industry showed strong divergent trends. Production in branches
dependent on foreign trade continued to shrink, while branches geared to
serving the emerging wartime economy experienced strong growth, BOFIT

The volume of retail sales shrank by 7.2% Y/y in the January-February period.
Food sales were down slightly, but sales of non-food items were off by 11.4%
Y/y. The drop in retail sales largely reflected the decline in sales of durable
goods. Some of this decline reflects lack of supply as sanctions and logistical
challenges limit imports of e.g. household appliances.

The February 2022 invasion sparked fears of higher prices, forced households
to accelerate their spending plans and caused consumer spending to spike in
March 2022. Although retail sales suffered an approximately 10% drop in April
last year, the situation stabilised thereafter. While the 12-month change in
March retail sales this year is likely to be similar to the previous two months,
the 12-month change is expected be diminish in the months ahead.

The economy continues to be supported by growth in the agricultural and
construction sectors. Construction activity increased by 11% Y/y in the first two
months of this year, although housing construction experienced no growth
whatsoever. Most of the growth in construction likely came from the
stepped-up pace of public infrastructure projects.

In January-February, nominal federal budget revenues plunged by nearly 30%
Y/y, while expenditures increased by about 50%. The spending burst is due in
part to changes in public procurement policies. As much as 90% of the value
of projects this year will be paid up front in an effort to stimulate industrial
output, particularly the military-industrial complex. Nominal spending on
government procurements in January-February 2023 was up by about 350%
from a year earlier. The federal budget deficit has skyrocketed, reaching nearly
4% of GDP for the 12-month period ending in February. Spending growth in
the consolidated budget (federal, regional and municipal budgets plus state
social funds) remained rapid last year, with spending in the fourth quarter up
by nearly 20% Y/y. The consolidated budget deficit in 2022 was 1.4% of GDP.
The federal budget deficit was 2.3% of GDP.

Exceptionally low unemployment rate

“As a consequence of war and mobilisation, Russia faces a labour shortage
that can already be seen in wage growth. The national unemployment rate fell
to just 3.5 % in February, its lowest level of the post-Soviet era,” BOFIT said.
“In the most industrialised regions in the Central Federal District of Russia, as
well as Moscow and St. Petersburg, the unemployment rate is currently below
3 %. While there are still large fluctuations across regions, the sole regional
unemployment rate in excess of 10 % was found in regions in the North

Despite recession, growth in nominal wages has remained brisk. Moreover,
real wages should start rising this year as inflation ebbs. In January, nominal
wages were up by 12.4% Y/y, and the average real wage up by 0.6%. The rise
in the average wage was most pronounced in government administration and
the currently thriving branches of industry such as metal refining and

An important driver of Russia's low unemployment rate is its shrinking
working-age population. The fastest decline has been seen in the past decade
in the cohort of Russians aged 20–40 years.

The labour supply is also influenced by changing migration patterns. In recent
decades, the Russian labour market experienced a fairly stable flow of fresh
workers from Central Asia and Caucasus regions.

Russia's migration statistics only tell part of the story. In particular, Russian
citizens moving abroad do not always officially register as emigrees.

GDP growth still low

Russia's gross domestic product (GDP) decrease slowed to 3.1% on the year
in February from 3.2% in January, the Economic Development Ministry said on
March 30. The ministry said that the economy was supported by the growth of
construction volumes, industrial output and cargo transportation, excluding via

One of the most striking results has been a 53% growth in light vehicle
production in February y/y, although most of this gain is a low base effect after
car production came to a virtual halt after the invasion of Ukraine a year ago.
Car sales remain down 44% y/y, but even this represents a strong recovery
from the July low when car production Russia came to a screeching halt.

Russia’s Economic Development Ministry upgraded its economic growth
forecast for 2023 from a fall of 0.8% to some small growth of between 0.1%
and 0.2%, Minister Maxim Reshetnikov said March 24. (chart) "We confirm that
our expectations for this year are positive, we expect significant growth based
on the figures connected with the economic development, investment, better
forecasts for people's income," the minister said, as cited by Prime.

The Central Bank of Russia (CBR) also upgraded its outlook for 2023 last
month from predicting a contraction to a more optimistic range of -1% to +1%.

Sanctions failing

If the goal of Western sanctions on Russia was to cripple the economy and
force the Kremlin to end its war in Ukraine then they have been an abject
failure. Not only have the Kremlin’s revenues not fallen, in 2022 Russia had a
current account surplus of $227bn – twice the previous year’s all-time record.
Russia made more money last year than at any time since the fall of the Soviet
Union three decades ago.

The major impetus for the Russian economy in 2022 has been the weakness
of sanctions and the willingness of many countries to act as transit routes for
banned goods headed for Moscow and beyond.

There have been ten rounds of sanctions, but at each round there were
significant calve outs and exceptions made as each round inflicts pain on
Europe as well as Russia and recent rounds have begun to inflict more pain on
Europe than they do on Russia.

In parallel to the partial nature of the sanctions, is the willingness of some
countries to act as way stations in the transit of Russian goods. Reexports
from Turkey to Russia boomed and shelves emptied in April as international
firms like Apple and H&M left were full of the same goods by the end of the
summer, but cost some 20% more to cover the costs of the traders that are
now bring in them in via intermediate countries.

This has led to a new effort by the west. In March EU foreign policy chief Josep
Borrell admitted that the West has run out of things to sanction and the same
week European Commission President Ursula von der Leyen announced that
an eleventh package was being drafted that would contain little that was new,
but would focus on making the existing sanctions work better.

Western and Russian diplomats have been travelling the world recently trying
to shore up support in March and bullying states into complying with sanctions
with some success. In the middle of March Turkey suddenly halted trade to
Russia, Hungarian Prime Minister Viktor Orban said he may have to “rethink”
his relations with Russia, Kazakhstan started inspecting exports to Russia to
see if they are sanctions compliant and Serbian President Aleksander Serbian
President Aleksander Vucic said that his country no longer ruled out the
possibility of imposing sanctions on Russia.

A game of whack-a-mole has begun as the West tries cajole or bully
non-aligned countries to join the sanctions regime. The recent successes
scored by this Western diplomatic effort have certainly made the sanctions
regime tougher, which will only increase the costs for the Russian economy.

The situation with the size of the budget deficit will not become clear until April
or May when the first convoy of Russian tankers return from Asia. However,
economists are predicting that MinFin will miss its 2% of GDP target and have
a short fall of not RUB2.9 trillion but something like RUB4trillion, or RUB6-9
trillion in the extreme scenarios.

Sino-Russian relations

The major political event was the visit to Moscow of Chinese President Xi
Jinping fro three days. Very little concrete was agreed, but the mere symbolism
of Xi visit was an act of defiance of the Western sanctions on Russia and
challenge to US global leaders. Xi was playing to the Global South audience,
showing China to be an alternative power centre to the US one.

In practical terms this relationship with China ensures Russia will have a
market for its fuel and commodities so that it wont go bust and sanctions will
ultimate fail insomuch as Russia will not face an economic crisis even its
growth and development will slow.

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