The Central Bank of Russia (CBR) has released its quarterly macroeconomic survey which highlights the growing economic headwinds Russia is facing, despite the prospect of stronger than expected growth this year.
Russia’s central bank interviews almost two dozen reputable and independent economists for their views which are then combined with the CBR’s own research in drawing up the report.
GDP: It was hoped that the twin oil sanctions imposed at the start of this year and massive military spending would drain the economy of blood and lead to a deep recession, but the opposite has happened.
Analysts improved the GDP forecast for 2023 to 2.5% (up 0.3 pp), the CBR reported. “The forecasts for the next three years and the estimate of the long-term GDP growth rate are unchanged at 1.5% per annum. According to analysts, the change in GDP in 2026 to the 2021 level will be 4.9%,” the CBR said.
Russia GDP, October 2023 survey. Source: CBR.
Inflation: the biggest problem Russia’s economy faces today is the return of inflation as the base effects wear off, and there is huge public sector spending on the military industrial complex.
On top of that a very tight labour market is leading to an acceleration in the rise of nominal wages that, although consumption is fuelling growth, is also feeding into rising prices.
All hopes of hitting the CBR’s 4% inflation target are now dashed after the regulator was forced to hike rates in August to stop a ruble meltdown, and the CBR doesn’t expect to meet this target until at least next year.
“The median inflation forecast for 2023 has been increased to 7.0% (0.7 pp compared to the September survey) and to 5.1% (0.6 pp) for 2024. Analysts expect inflation to return to the target of the Bank of Russia in 2025 and remain at this level in 2026,” the CBR said.
Russia CPI, October 2023 survey. Source: CBR.
Key rate: As bne IntelliNews reported, CBR governor Elvia Nabiullina conducted an unorthodox experiment earlier this year, by letting the ruble significantly weaken while at the same time trying to control inflation by going slow on rate hikes. A weaker ruble creates more rubles for the government and so this was a monetary way of helping Russian Finance Minister Anton Siluanov close the budget deficit without borrowing or hiking rates.
But it went wrong. In the middle of August the ruble started to go into meltdown, leading the CBR to put through a large 350bp rate hike on August 15 followed by another 100bp a month later. At least one more rate hike is expected this year as the ruble is still weak and inflation is rising.
“Analysts expect a higher trajectory of the key rate. They have raised their expectations to 9.8% per annum (up 0.5 pp) on average in 2023 (assuming the average key rate of 14.2% per annum in October-December 2023), 12.6% per annum (up 2.6 pp) on average in 2024 and 8.2% per annum (up 0.5 pp) on average in 2025. Analysts’ median estimate for the neutral key rate is unchanged at 6.0% per annum,” the CBR said.
Russia monetary policy rate, October 2023 survey. Source: CBR.
Unemployment rate: The war in Ukraine has siphoned off a lot of labour, leaving the labour market extremely tight. That has driven unemployment rates down to historical lows.
“Analysts have lowered the forecast for 2023-2025 by 0.1-0.2 pp to 3.1%, 3.2% and 3.3%, respectively. According to their expectations, the unemployment rate will rise to 3.5%,” the CBR said.
Russia ILO unemployment, October 2023 survey. Source: CBR.
Nominal wages: Russian real incomes were falling slowly for years before the war, but the combination of low inflation, increased public spending on defence and the tight labour market have combined to push nominal wages up rapidly and make real incomes rise as well.
Until the war in Ukraine ends those forces remain at play, however, as inflation is expected to keep rising, real incomes will fall sharply next year, until the CBR has mastered inflation in 2025 when they will start to rise again.
“Analysts expect higher growth in 2023, at 12.3% (1.1 pp) with growth slowing to 8.1% (0.3 pp) in 2024, to 6.5% in 2025. The growth forecast for the end of the forecast horizon is 6.0%. Calculations based on analysts’ forecasts of nominal wages and average CPI suggest that real wages will increase by 6.1% in 2023, by 1.6% in 2024, by 2.1% in 2025 and by 1.9% in 2026. Accordingly, by the end of the forecast horizon real wages will be 12.5% higher than in 2021,” the CBR said.
Nominal wages, October 2023 survey. Source: CBR.
Consolidated budget balance: The budget deficit has been on a real roller coaster ride this year, starting off in a deep RUB1.7 trillion shortfall, before starting to recover in the first quarter and going back into profit in May. As Siluanov predicted at the start of the year oil revenues have recovered and the government is on course to hit the Ministry of Finance’s 2% of GDP target.
More recently Siluanov said that the deficit this year might be as little as 1% of GDP thanks to rapidly rising oil prices.
“Analysts expect a smaller consolidated budget deficit in 2023-2024 at 2.1% of GDP (-0.2 pp) and 1.5% of GDP (-0.1 pp), respectively. Analysts’ deficit forecasts for 2025-2026 are unchanged at 1.0% of GDP,” the CBR said.
Russia's budget deficit, October 2023 survey. Source: CBR.
Exports of goods and services: Trade has been severely restricted by the international sanctions regime, but traders have been hard at work building new supply chains and most of the goods that disappeared in the early days of the war are now back on the shelves. However, with the trade disruptions and associated constrictions, trade volumes are flat and not expected to change much.
“No significant changes. Forecasts for 2023 have been slightly lowered to $484bn (-$5bn). In contrast, the forecasts for the following years have been increased to $508bn ($6bn) in 2024, $518bn ($3bn) in 2025 and $517bn ($7bn) in 2026. Analysts expect that by the end of the forecast horizon exports will be 6% lower than in 2021,” the CBR said.
Russian exports, October 2023 survey. Source: CBR.
Imports of goods and services: The situation with imports is more or less the same and no great changes are expected this year.
“No significant changes. Imports are forecast at $381bn for 2023, $390bn for 2024 and $409bn for 2025. Analysts expect that by the end of the forecast horizon imports will amount to $421bn. This is by 10.8% higher than in 2021,” the CBR said.
Russian imports, October 2023 survey. Source: CBR.
USD/RUB exchange rate: The ruble has also been on a rollercoaster ride this year and weakened continually since the start of the year, before starting to meltdown in the middle of August.
The CBR intervened with a big rate hike, but with $256bn of capital flight in 2022 and $27bn so far this year, coupled with weaking commodity exports, the currency remains weak. Analysts say all else being equal the fair value for the ruble should be about RUB90 to the dollar but it is unlikely to reach that level until peace returns.
“Analysts have revised downwards their forecasts for the exchange rate over the entire forecast horizon. Analysts’ forecast for 2023 is 86.0 rubles per dollar (assuming the average exchange rate in October-December 2023 will be 96.0 rubles per dollar), 94.0 rubles per dollar for 2024, 97.5 rubles per dollar for 2025 and 98.2 rubles per dollar for 2026 (revised by 0.6-7.4% compared to the September survey).
RUB/USD exchange rates, October 2023 survey. Source: CBR.
Urals oil price: The price of Russia’s Urals blend of oil collapsed after the war broke out as traders self sanctions and stopped buying it. However, as the year wore, the price has recovered and the discount to Brent blend has steadily closed to around $14 as of the middle of October.
At the same time all oil prices have been lifted by the OPEC+ voluntary production cuts that have been extended into the start of next year lifting Urals with it.
“[Analysts say the price of Urals will be] higher by $1-7 per barrel over the entire forecast horizon. According to analysts’ expectations, the average Urals oil price in 2023 will be around $64 per barrel (assuming the average Urals oil price in October-December 2023 will be $78 per barrel), $72 per barrel in 2024 and will decrease to $67 per barrel in 2025-2026,” the CBR said.
Urals oil price OOTT, October 2023 survey. Source: CBR.