Russian Country Report May23 - May, 2023

May 4, 2023

Russia's economy is performing better than expected, despite the problems
caused by extreme sanctions. The Bank of Russia has improved its forecast
for inflation and GDP growth, predicting a range of 0.5-2% growth. This
forecast is even more positive than that of the Ministry of Economic
Development, which predicted 1.2% growth.

Other indicators also suggest a bounce back and growth this year S&P Global
released the services PMI index, which showed an extremely strong expansion
of 58.1, and another good month for the manufacturing PMI.

Companies and citizens have again demonstrated the ability to quickly adapt
to new circumstances, and state support measures have helped the economy
through a flurry of sanctions, said CBR governor Elvira Nabiullina in April
presenting a much more upbeat outlook for 2023.

Banks and other organizations of the financial sector worked stably, providing
the country with the necessary financial resources. In March, contrary to all
expectations of economists, the Russian industry showed growth for the first
time since March 2022, thanks to the production of military goods.

At the same time inflation has plunged and was only 3% in March, partly
thanks to low base effects, but the CBR estimate it will end at about 8% -- one
of the lowest levels in Europe. The heavy military spending is also expected to
push inflation up this year, but the CBR seems to be well prepared for
inflationary pressure.

Russia's unemployment rate remains extremely low, falling to just 3.5% in
February, while wage growth is being felt due to the labour shortage. The
decline in Russia's working-age population is also influencing the labour
supply, with the fastest decline being seen in the cohort of Russians aged
20-40 years, which accounts for most of the conscripts as well as those that
have fled the country due to the war. The labour market is further affected by
changing migration patterns, with a decline in the number of fresh workers
from Central Asia and Caucasus regions.

In January-February, nominal federal budget revenues plummeted by almost
30% y/y, while expenditures increased by about 50%, leading to a significant
increase in the federal budget deficit, reaching nearly 4% of GDP for the
12-month period ending in February. However, in April, the budget is expected
to go back into surplus and stay there for the rest of the year after the
benchmark used to calculate taxes was changed. Previously the Urals price
was used, but that is the price used on the European delivery routes which
have collapsed. From April 1 Ministry of Finance is using a simple Brent minus
a discount formula which will better capture the oil trade with Asia. That should
see oil and gas revenues recover in the second half of this year.

Despite the Western sanctions imposed on Russia in 2022, the Russian
economy has managed to withstand it, according to Nabiullina. Speaking in the
State Duma, she said that “State support measures were sufficient and prompt
and helped the economy through a flurry of sanctions." The Central Bank has
pursued a policy that ensured the preservation of financial stability and a fairly
rapid restoration of price stability.

Vladimir Putin finally decided to move on to direct nationalization of foreign
assets. On April 25, the Kremlin issued a presidential decree allowing it to
respond to the nationalization of Russian assets abroad by transferring the
assets of foreign companies in Russia to the temporary administration of the
Federal Property Management Agency. The first were the Russian assets of
the Finnish concern Fortum, the largest investor in the Russian power industry,
which in the spring of 2022 announced the impending sale of its Russian
assets but could not sell them due to restrictions imposed by Putin's previous

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