Main questions to answer:
- Why problems in Russian economy, are far not so serious as majority of experts predicted?
- Current trends in Russian economy, and how long Putin can afford himself to continue this war?
- What is real economic impact of sanctions imposed by western countries?
Sources: Stockholm International Peace. Research Institute, Word Bank
Source: Word Bank
Source: Word Bank
Source: Word Bank
Sources: Rosstat, Central Bank of Russia, Ministry of Finance of Russia
The main risks for the Russian Economy 2024-2025. Deficit of labor force
Source: Rosstat
- Russia faced decrease of labor force few years before the war because of demographic reasons.
- At least 600 000 people were mobilized or went to military service for money.
- 1-2 million Russians were additionally hired in the weapon producing industries, military support services, medical workers, logistics and construction works connected with the war.
- According to various estimates, war time emigration is between 400 000 and 1 000 000 people.
The main risks for the Russian economy 2024-25. Inflation and hard choice between budget incomes and stability on currency market
- Monetary base grew by 20% in 2022, 8.5% in 2023 and is shrinking in the first months of 2024.
- Inflation at the end of 2023 was 7.42%. In other words, we see that, at least since the summer of 2023, inflation has noticeably outpaced the growth rate of the monetary base and M2.
- Inflation expectations of population are still high.
- Central bank rate is 16% which means real cost of money of more than 8%.
- Share of household income directed to bank deposits, which for many years fluctuated in the range from 0% to 6.6%, reached a record 13.2% in the 4th quarter of 2023. Consumer lending in Q4 2023 stagnated in nominal terms (i.e., decreased in real terms). The total share of consumption in household income is around a historically low 80%.
Other risks 2024-25
- Unpredictable oil prices. Oil and products made of it is fast 1/2 of Russian export and about 1/3 of federal incomes. Drop of oil prices to 40$ per barrel will lead to lose of budget revenues fast equal to war spendings. Russian export in 2023 decreased by 18% in constant prices. In the same time import returned to prewar levels.
- Lack of free industry capacity. Capacity use by the end of 2023 exceeded 80% in the economy as a whole, approaching 100% in some industries.
- Risk of increase of emigration and capital outflow in case of new wave of mobilization.
Budget deficit is not a big issue at the moment
- The 2023 budget deficit was 1.9% of GDP, and the 2024 deficit is projected at 0.9% of GDP. This is less than the “peaceful” deficit level of most modern economies.
- The liquid part of the national reserve fund is about 3% of GDP, i.e. approximately equal to the expected deficit of 2024-2025.
- The announced tax increase should ensure an increase in budget revenues by another 1-1.5% of GDP starting from 2025.
- Due to the improvement in the quality of tax administration, over the past 15 years, the growth rate of tax collection has consistently outstripped the GDP growth rate even with unchanged tax rates.
Source: Central Bank of Russian Federation
Over 1000
foreign firms had withdrawn from Russia
20%
of the businesses active in Russia before the war’s inception actually departed
Source: Central Bank of Russian Federation
Source: Central Bank of Russian Federation
Source: “Russia Under Non-Military Pressures: Expectations, Realities, and Lessons of Sanctions”. Dr. Vladislav Inozemtsev etc. The European Center for Global Challenges, Oct 2023
Source: Thomson Reuters
Source: Rosstat
Sanctions from which Russian economy and Putin’s regime mainly benefited
01
Visa problems
In 2023 EU countries issued to Russian citizens 10 time less visas than in 2019. Increase of visa requirements restrained emigration of labor force and potential soldiers.
Especially taking into account that main problem of Russian economy now is the deficit of labor force.
02
Ban on money transfers
Difficulties for money transfers outside of Russia restrain outflow of capital held by Russian middle class.
The money which could have been placed in the west are held on deposits in Russian banks which are main buyers of state debt.
Instead of stimulating capital outflow western countries intentionally lock private capital inside Russia. And this capital is now used to finance the war.
03
Arrest of private assets
Threat of arrest of assets of rich Russians lead to return back to Russia of at least 100 billion dollars.
This effect can’t be anyhow cured.
04
Imposement instead of enforcement
Instead of constant invention of new regulations majority of which does not really work or have very limited impact, it is much more efficient to focus on enforcement of a few sanctions having large impact.
Conclusion
- Adaptation to war and sanctions and the resulting structural transformation of the the Russian economy have generally been finished. In the perspective of 1-2 years, we should expect an inertial continuation of the existing trends. In other words, a further reduction of trade balance, stagnation or insignificant reduction in investment and household consumption, offset by an increase in government consumption.
- Current war burden does not create any critical risks for the Russian economy. If the intensity of war will not increase rapidly, Putin can easily afford himself few more years of such a war.
- Majority of the economic problems caused by war usually comes with war end. The US economy fell by 11.6% in 1946 (this is the second worst indicator in history), and the British economy by 25.3% in 1919-1920. The inflation highs were also observed in the first after war years. Increase of unemployment is also unavoidable.