From BOFIT, on 16 February 2024:
PRELIMINARY FIGURES SUGGEST SURPRISINGLY ROBUST RUSSIAN GDP GROWTH IN 2023
final week launched its preliminary 2023 information, which confirmed that Russian GDP grew by 3.6 % in 2023. Progress was clearly greater than both worldwide or Russian forecasters had anticipated. For instance, the newest forecast revealed by the Central Financial institution of Russia (CBR) final November estimated GDP would develop by about 2.5 % in 2023. The forecast replace revealed by the Worldwide Financial Fund (IMF) in late January stated progress probably reached 3.0 % in 2023.
This yr, Rosstat additionally launched unusually quickly a breakdown of GDP contributions on the demand and provide sides. Data on exports and imports, nonetheless, remained fairly restricted, making it more difficult to interpret the GDP information. Whereas there aren’t any clear indications of in depth and systematic statistical manipulation, the uncertainty surrounding the info and its inconsistencies have elevated. We may be pretty positive that the Russian financial system grew final yr, however any particular progress determine must be taken with a excessive diploma of warning.
DOMESTIC DEMAND DRIVES GROWTH AND SUPPORTS WAR INDUSTRY
Elevated home demand was the motive force of GDP progress. Preliminary figures present that public consumption rose by 3.6 % final yr, i.e. the most important achieve within the historical past of present GDP reporting beginning in 1996. Family consumption bounced again strongly from its dip in 2022. Fastened funding progress reportedly climbed by 10.5 % final yr and stock progress turned considerably optimistic. The international commerce parts are revealed solely in present costs, which makes it tough to seize the impacts of worth adjustments. Russia’s isolation from the worldwide financial system is, nonetheless, evident within the decline within the share of exports, which corresponded to only 23 % of GDP final yr – the bottom stage within the present GDP statistical sequence beginning in 1996.
On the provision facet, rising home demand has fuelled progress in industries linked to the battle effort, development and retail gross sales. Industries serving the battle effort and the development trade have grown quickly through the previous two years and their 2023 output figures had been a lot bigger than in 2021. Manufacturing progress, specifically, has relied largely on war-related industries. Output of producing branches contributing to the battle effort final yr had been up by roughly 35 % from 2021, whereas different manufacturing branches as ana combination had been down by 0.4 %. Even with financial restoration, many industries resembling automobile manufacturing and air transport final yr skilled output effectively beneath pre-war ranges.
Russia’s GDP progress has been led by war-related manufacturing industries and development sector
Notice: Struggle industries is a proxy measure consisting of producing branches linked to the battle effort (manufacturing of fabricated steel merchandise, electronics and different transport gear).
Sources: Rosstat, BOFIT.
OUTPUT GROWTH CONTINUES TO SLOW
Month-to-month information recommend that output progress has slowed in latest months. Industrial output, retail gross sales and different providers have remained flat for a lot of months. Solely development seems to have confirmed sustained progress on the finish of final yr.
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Latest forecasts see Russian GDP progress slowing this yr. The CBR launched its new forecast at present and expects GDP to develop 1-2 %. The IMF forecasts GDP progress of two.6 % and the OECD 1.8 %. The Consensus Economics common of forecasts launched in January anticipated progress of 1.7 % this yr.
From Mark Sobel, US OMFIF Chari, previously US Treasury, 12 February, in “Russian financial ‘resilience’ is just not what it appears”
Don’t overestimate the dimensions of Russia’s financial system
Russia’s battle footing and the related fiscal enlargement is a transparent driver of the financial system’s present strong exercise. In line with draft plans from the federal government, Russia is rising actual navy spending this yr by virtually one-third, accounting for over a 3rd of spending and round 7% of gross home product.
However one shouldn’t overstate the financial system’s measurement and vigour. As a share of the worldwide financial system, Russia has fallen in buying energy phrases from practically 4% earlier than the 2008 monetary disaster to below 3% (and utilizing market change charges to now effectively below 2%).
Oil proceeds are a vital income supply. Russian officers have indicated that Brent crude must be $85 per barrel in 2024. Nevertheless, Brent has traded beneath that stage to this point this yr. Furthermore, Urals oil trades at a big low cost to Brent, and there’s monumental opacity surrounding the discounted worth Russia receives as it’s extremely depending on offers with China and India.
US and G7 efforts to strengthen the oil worth cap and curtail sanctions evasion (for instance by Greek tankers) will even impression income. They sadly haven’t harm the Russian financial system anyplace close to as a lot as desired.
Whereas Russia ought to be capable to simply finance its deficit, a number of expensive macro elements come into play. Inflation is elevated and the central financial institution is sustaining excessive rates of interest within the mild of the outlook for costs. That can erode actual incomes and crimp funding. The ruble will on common weaken as foreign money depreciation generates extra rubles for the finances. The foreign money would perhaps weaken a lot additional had been it not for capital controls. Russia additionally will presumably draw down on the Nationwide Wealth Fund.
Extra typically, the Russian financial system may be more and more characterised as a system of power manufacturing financing surging navy spending, with little innovation elsewhere in a society already effectively behind others on the technological frontier. However, in fact, the reliability of financial information ought to at all times be taken with a pinch of salt, and particularly Russian financial information within the present circumstances.
Geopolitical vulnerability
Russia’s rising dependence on China, India, Iran and others is a vulnerability past power market developments. India is strengthening relations with the US. China needs to keep up robust export ties to the US and Europe. However low cost power, China and its companies will likely be cautious of their Russia dealings, fearing that they may run afoul of US sanctions, particularly those who might block entry to the US monetary system.
Within the meantime, Russia’s human capital is being sharply eroded. The dying of troopers (estimates recommend over 300,000 troopers killed or badly wounded) and an unlimited mind drain (estimated as much as 1m, the majority of whom are younger and effectively educated) are imposing an enormous lack of human capital and reportedly straining labour markets. These elements will hurt Russian productiveness effectively into the longer term.
Western sanctions on expertise, even when considerably circumvented due to transshipments and different leakages, are hurting the financial system. Reviews abound in regards to the lack of spare elements – for instance, the difficulties in totally maintaining Russian airplanes afloat. Russia will even face difficulties growing many power fields with out western providers.
The chance value of the battle footing can also be seen within the quite a few stories of burst pipes and the lack of winter heating all through Russia as primary infrastructure wants go unmet.
See additionally Martin Sandbhu in FT (Feb 11).
Right here’s my August blogpost making an attempt to find out what progress ex-military spending would appear to be in 2023.
