Russian Country Report Jun23 - June, 2023

June 2, 2023

Russia's GDP experienced a contraction of 2% year-on-year in the first
quarter of 2023, according to preliminary estimates from Rosstat. The decline
in GDP was less severe compared to the same period last year, which was
heavily impacted by the invasion of Ukraine. Throughout 2022, Russia's GDP
contracted by 2%.

In the second quarter the Bank of Russia expects economic growth by 4.2%,
according to the report on the regulator’s monetary policy released at the end
of May.

The May consensus forecast predicts a further contraction of 0.3% for this year
although the official forecasts from the Central Bank of Russia (CBR) and the
Ministry of Economics is more optimistic and predicting mild growth for 2023.
The war in Ukraine has had varied effects on different sectors of the Russian
economy. Household consumption has decreased, while investments have
increased with government support. Government spending has also been
significantly elevated to finance the war and stimulate the economy.
The retail trade, a reflection of consumption patterns, has remained sluggish,
although there have been some signs of recovery. In the first quarter, retail
sales volume declined by 7% compared to the previous year. The car trade, in
particular, continues to struggle, with new car sales plummeting to less than
half of pre-war levels, although sales have started to recover in recent months
as Chinese companies enter the market to fill the hold left by the departing
OEMs.
In terms of real disposable income, Russian households have seen little
change in the first quarter compared to a year earlier. Income growth has been
supported by lower inflation rates and higher wages. Consumer prices rose by
9% year-on-year during the same period.
The tight labour market situation has put pressure on wage increases.
Unemployment stood at a historically low level of 3.5% in the first quarter, but
the workforce has been shrinking even prior to the war due to demographic
factors and emigration.
Investments have experienced rapid growth in recent months, particularly in
construction and the production of certain investment goods. Construction
grew by 9% year-on-year in the first quarter, driven by infrastructure projects
and a government subsidy programme to support mortgages. However,
residential construction has peaked.
The manufacturing sector saw mixed results, with a 1% increase in production
in the processing industry compared to the previous year. The production of
metal products and various building materials recorded strong growth.
Conversely, sectors reliant on foreign trade and foreign companies faced
contraction, such as wood processing (-17%), automotive industry (-40%), and
mechanical engineering (-12%). Import restrictions resulting from sanctions
have made it challenging for companies in these industries to find alternative
raw materials, machinery, and spare parts.
Primary production also displayed variable trends, with a 3% growth in
agricultural production but a 3% contraction in extractive production. Natural
gas production declined by 14%, and oil production figures were no longer
published by Rosstat. According to the International Energy Agency (IEA),
Russian crude oil production declined by approximately 2% in the first quarter
compared to the previous year.
Government spending has continued to rise rapidly, providing a boost to
production across various sectors. Federal budget expenses increased by
22% year-on-year in the first four months of the year. However, income
decreased at a similar rate. The budget deficit for January-April already
exceeded the projected deficit for the entire year 2023. The approved budget
framework aims for a federal budget deficit of 2% of GDP, with slightly reduced
expenditures compared to the previous year. However, reducing spending will
be challenging if the war in Ukraine continues.

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