Russia’s economy recovering from sanctions shock, but not out of the woods yet

Russia’s economy recovering from sanctions shock, but not out of the woods yet
Russia’s economy recovering from sanctions shock, as the rates of contraction in industrial production and retail sales slow, but they are still negative. / bne IntelliNews
By bne IntelliNews March 30, 2023

The Russian economy is showing signs of recovery in the first quarter of this year, as the rate of decline in industrial production slows, according to RosStat data released on March 29.

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 pipelines.

One of the most striking results has been a 53% growth in light vehicle production in February year on year, 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.

The recovery in the automotive sector has largely been driven by Chinese and Iranian firms that have rapidly moved in to take over the hole left by departing European Original Equipment Manufacturers (OEMs) and US carmakers, which have pulled out en masse.

Overall, industrial product contracted by 1.7% y/y in February, an improvement from January's contraction of 2.4%, RosStat reports. Seasonally adjusted month-on-month data indicates a rise of 0.5%. (chart)

Retail sales, which declined by 6.6% y/y in January, fell by 7.6% in February. However, retail sales rose by an unexpected 0.8% month on month in seasonally adjusted terms, following a sharp increase in January. (chart) Food and non-food sales rose by an estimated 0.5-1.0% m/m in seasonally adjusted terms.

“This follows sharp increases in sales in January and suggests that consumer-facing sectors have turned a corner. That said, households remain very cautious about spending, evidenced by surveys showing a growing share of consumers intending to save,” said Liam Peach, an emerging market economist with Capital Economics, in a note.

Manufacturing was the primary driver of the industry's pick-up, with increases in the production of motor vehicles, metals, and chemicals. While mining output growth stabilised at -3.2% y/y, seasonally adjusted terms suggest a slight increase due to a rise in oil production and metal ore mining.

“Overall, the latest data for February continue a run of relatively strong activity figures in recent months and point to a recovery in Russia’s economy towards the end of last year and the start of this year. This comes alongside a marked improvement in business surveys since the start of the year,” Peach added.

While oil production is expected to decline in March by 0.5mn barrels per day (bpd), it is likely that GDP expanded in the first quarter, says Capital Economics. Russia's economy has demonstrated a much greater ability to weather sanctions pressure than had seemed likely since mid-2022. As a result, Capital Economics’ GDP forecasts for 2023 were revised up from -2.0% to -0.3%, which brings it in line with the earlier controversial World Bank estimate that Russia’s economy would grow by 0.3% in 2023.