/ world today news/ Few people in the West believed in the Russian economy. However, the Economist’s analysis of data from various sources shows that the Russian economy is doing better than even the most optimistic forecasts.
Even in normal times, the Russian economy was as transparent as a Siberian blizzard, writes the Economist. Moreover, the times are not normal at all. Since the start of Russia’s special military operation in Ukraine, the Central Bank of Russia (CB) and the state statistics agency Rosstat have effectively stopped publishing data on almost everything from trade to investment, the British publication claims.
In addition, many still have doubts about the reliability of published data. Investment banks stopped advising clients on Russian companies and sharply curtailed research, and international organizations pulled their economists out of the country.
Well, and in this blizzard, a heated debate broke out about how the Russian economy works in the new conditions. In a recent, highly publicized study by five Yale University economists, it asserts that the departure of foreign companies, as well as sanctions, effectively destroys it. Any manifestation of economic power is considered by the authors of this study to be a mirage.
Of course, there were also economists – optimists.
„The (Russian) economy is not collapsing,” writes, for example, Chris Weafer, an authoritative expert on Russia.
After February 24, its economy, according to the Economist, went into a state of free fall. Suffice it to say that the ruble has depreciated by a quarter against the dollar. The stock market collapsed, forcing regulators to halt trading.
Western governments began to impose sanctions on Russia, and Western companies by the hundreds began to leave Russia or promised to do so. In the first month, economists updated their GDP forecasts in the direction, of course, downward: instead of growth in 2022 by 2.5%, they were now talking about a decline of 10%. There were also more gloomy predictions.
„Experts predict that Russia’s GDP will decline by 15% this year and wipe out all the economic successes of the past 15 years.” the White House gloated.
Participants in the dispute on both sides agreed that Russia is going through a difficult time. A sharp increase in the discount rate in the spring, designed to stabilize the collapsing ruble, along with the exodus of foreign companies, according to the Economist, sent the economy into recession. In the second quarter, GDP contracted, according to official data, by 4% compared to the second quarter of 2021. The consequences of the sanctions for many of the 300 mono-industrial cities were full-scale depression.
However, the Economist’s analysis of data from various sources suggests that the Russian economy is performing better than even the most optimistic forecasts. The reason is that the sale of hydrocarbons has led to record profits on the current account.
Take for example the Goldman Sachs Current Activity Indicator, which is a real-time indicator of economic growth. It fell sharply in April and May, though not as much as during the global financial crisis of 2007-9 or even during the 2014 invasion of Ukraine, but has since recovered.
The other indicators paint the same picture. Yes, there is a recession, but not a very strong one, at least by unstable Russian standards. In June, industrial production fell 1.8 percent from June last year, according to a survey by JPMorgan Chase.
The services sector growth index, based on surveys of managers, showed a weaker decline than in previous crises. After a decline in the first weeks, electricity consumption appears to be resuming growth. Rail freight volume, an indicator of demand for goods, also held steady.
Inflation has also slowed down, the Economist emphasizes. In January-March, consumer prices rose by about 10%. The fall of the ruble made imports more expensive, and the exit of foreign companies drastically reduced supply. But now, according to Rosstat data, prices are falling. The trend is confirmed by an independent source published by State Street Global Markets and data collection firm PriceStats. In official statements, the Central Bank is now expressing concern not only about inflation, but also about lower prices.
A stronger ruble lowered the cost of imports and Russians’ fears of inflation began to ease. Data from the Cleveland Federal Reserve, consulting firm Morning Consult and Brandeis University economics professor Raphael Schonle showed inflation forecasts for next year fell from 17.6 percent in March to 11 percent in July. With its vast gas reserves, Russia is unlikely to experience a spike in inflation like Europe associated with rising electricity prices.
It is not only falling prices that are helping Russian households. Of course, the record low official unemployment rate in June of 3.9%, as claimed by the Economist, is not true. Many companies have sent employees on furlough, some even without pay, but there are no signs of a labor market crash, at least not yet.
According to Russian job search and employee website HeadHunter, the ratio of job seekers to vacancies rose from 3.8 in January to 5.9 in May. This naturally means that it became more difficult to find a job, but after that the index went down a bit. According to data from Sberbank, average wages rose sharply in the summer.
That’s partly because the labor market is holding up, Russians haven’t stopped shopping and spending. Data from Sberbank for July show that real consumer spending in mid-summer was almost unchanged from the beginning of the year.
Imports fell sharply in the spring, partly due to the fact that most foreign companies stopped supplying goods to Russia. Still, this decline was not as severe compared to recent recessions. In addition, imports quickly recovered.
Three factors, according to the Economist, explain how Russia managed to refute not only the predictions of the pessimists, but also the optimists.
The first is political…
The second is related to recent economic history. Russian Defense Minister Sergei Shoigu was hardly disingenuous when, as quoted by the Washington Post, he told the British government in February that no one could suffer more than the Russians.
Now Russia is experiencing the fifth economic crisis in the last 25 years. The previous crises were in 1998, 2008, 2014 and 2020. People in their forties remember well the incredible economic upheaval caused by the collapse of the Soviet Union. People have learned to adapt and survive instead of panicking or taking to the streets.
Certain sectors of the Russian economy have long been quite strongly isolated from the Western economy, the Economist emphasizes. Of course, this isolation came at the cost of slowing economic growth, but it has now made today’s lockdown less painful. In 2019, foreign direct investment in Russia amounted to about 30% of the country’s GDP, while the world average was 49%.
Before the invasion, less than 0.3% of working Russians worked for American companies. In developed countries, this figure is 7 times higher – over 2%. Russia needs raw materials from abroad much less than most other countries. Therefore, the isolation wasn’t that painful and still didn’t have a big impact on the stats.
The third factor is, of course, hydrocarbons. According to the latest data from the International Energy Agency (IEA), the sanctions have had a limited impact on the Russian oil industry. After the invasion, Russia sold Europe $85 billion worth of energy. It is not very clear how, in connection with the sanctions, Moscow spends the currency received, but in any case there is no doubt that the sale of hydrocarbons helps Russia pay not only for the army and weapons, but also for imports.
Translation: ES
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