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When it comes to the impact of sanctions on the Russian economy, one can often hear polarized opinions: some hotheads claim that Russia has been devastated by sanctions, others that everything is in order and sanctions do not work at all. But as often happens, the truth lies somewhere in the middle.
Some sectors have been hit very hard, such as retail and import-dependent manufacturing (car production fell 67% in 2022). Many analyzes tend to focus on these sectors as evidence that the sanctions have caused serious damage to the economy, but this approach overgeneralizes the situation. The automotive sector accounts for only 0.3% of Russia’s GDP. And data for the first quarter of 2023 showed that a significant decline in retail and wholesale trade (-10.1% y/y) was the exception, not the norm. Sectors, which account for more than half of the Russian economy, expanded in the first quarter of 2023, including most services.
The latest data for the second quarter was good and shows that the economy has maintained momentum. Retail sales and industrial production continued to rise (fueled, of course, by state defense orders) in April, and surveys for May, including the Central Bank’s business climate indicator, show firms haven’t been as optimistic about the outlook for more than a decade.
Yes, this raises a fair question: can we trust Russian economic data or not? Answer: plus or minus yes. Private sector data, independent surveys, ship tracking data and trade data from Russia’s trading partners generally show that the Russian economy is adapting well.
In short, growth in many sectors of the economy has more than offset weakness in the hardest-hit sectors.
So why has the Russian economy proved so resistant to sanctions?
There are many reasons, let’s list the most important of them. Efforts made since the imposition of sanctions in 2014 to reduce Russia’s dependence on the West. For example, de-dollarization: if on January 1, 2018 the share of the American currency in the assets of the Central Bank was 45.8%, then on January 1, 2022 it was 10.9%. Competent actions of the Central Bank in March 2022: raising the interest rate to 20%, limiting the movement of capital, etc. The ability of Russia to bypass trade and financial sanctions through third countries and expand trade and financial ties with countries that are not subject to sanctions. But, perhaps, the main thing is the huge current account surplus (the excess of exports over imports). Reason: higher oil and gas prices, especially in the first half of 2022.
In general, to understand the difference between financial and trade sanctions, a brief overview of the balance of payments is needed. Put simply, current account deficit countries are net borrowers from abroad, while current account surplus countries are net creditors to the rest of the world. Sanctions that restrict cross-border financial flows can have a significant impact on countries with current account deficits, cutting off the capital inflows needed to finance such deficits. This could lead to a sharp depreciation of the currency and a potentially rather painful reduction in domestic demand and imports to reduce the deficit. In countries with current account surpluses, this adjustment mechanism is much weaker, since such countries are less dependent on external borrowing. Overall, Russia hasn’t experienced that much adjustment pressure last year, at least not since the initial shock, as the current account soared and the Central Bank imposed capital controls to stem capital flight.
In summary, countries with current account surpluses will generally be less susceptible to the negative effects of sanctions than countries with current account deficits.
For most of 2022, Russia was on the wave of a boom in energy prices, but today the reality is completely different – the celebration of life could not last forever. Many of the factors that softened the blow to the economy have disappeared, and new uncertainties have emerged in their place. First, Russia’s current account surplus has contracted sharply. Secondly, oil and gas revenues began to fall, while government spending began to rise: as a result, a federal budget deficit arose.
Does the budget deficit pose a threat to macroeconomic stability in the coming years? Answer: no. The budget deficit is likely to stabilize at 3-4% of GDP this year (from 2.2% in 2022). The same applies to 2024. Yes, the deficit is significant, but covering it will not be as difficult as some claim.
Russia has liquid assets in the National Welfare Fund equal to 4.5% of GDP (funds in the central bank account). Depending on the various scenarios, the yuan in the piggy bank should last at least until the end of 2024, and at the maximum – until the end of 2025.
However, the reserves will not be completely devastated. The state relies on domestic borrowing. Russia as a whole has low interest costs on debt (1% of GDP per year), so it can afford to issue expensive debt without rapidly deteriorating its financial condition. Even if the government were to issue all bonds with a fixed 10% coupon (about the same yield on 10-year bonds today), interest costs on debt would likely rise from 1.0% of GDP to 1.5% by 2026.
And of course, there is another favorite way to replenish the budget – raising taxes (all sorts of windfall tax, etc.)
But here it is important to emphasize a couple of things: all of the above is relevant if the price of Urals oil remains at least at the level of the price ceiling (+-$60 per barrel) and there is no sharp increase in military spending.
As for the current account, a surplus of 2-3% of GDP is needed to maintain macroeconomic stability. The surplus was over 10% in 2022, likely to be around 3.3% in 2023 and 2.5% in 2024.
In short, there are no serious macroeconomic threats yet. But from 2025, uncertainty will increase significantly. However, what will happen there after 2025 is pointless to argue. Let’s see.
Telegram channel “pig tea party»
2023-07-24 17:10:00
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