Even in normal times
the Russian economy is about as transparent as a Siberian snowstorm—and
these are not normal times. Since Russia’s invasion of Ukraine the
Central Bank of Russia (cbr), and Rosstat, the official
statistics agency, have stopped publishing data on everything from trade
to investment; many question the reliability of those numbers that are
still emerging. Investment banks, no longer advising clients on Russian
companies, have pared back their research efforts. Multilateral
organisations have pulled economists out of the country.
In
the blizzard, a furious debate has erupted about how the Russian
economy is performing. A recent paper by five researchers at Yale
University, which has garnered widespread attention, says that a retreat
of Western firms and sanctions are “crippling” it. Any apparent
economic strengths are a mirage. “Putin-selected statistics are then
carelessly trumpeted across media and used by reams of well-meaning but
careless experts in building out forecasts which are excessively,
unrealistically favourable to the Kremlin,” the researchers argue.
Others are less gloomy. “The economy is not collapsing,” wrote Chris
Weafer, a respected Russia-watcher, in a recent paper. Where does the
truth lie?
After
Russia invaded Ukraine, its economy went into free fall. The rouble
lost a quarter of its value against the dollar. The stockmarket crashed,
forcing regulators to suspend trading. Western companies pulled out of
Russia, or pledged to do so, by the hundred, as their governments
slapped on sanctions. Within a month analysts had revised down their
forecasts for Russian gdp in 2022 from growth of 2.5% to a decline of close to 10%. Some were even gloomier. “Experts predict Russia’s gdp will contract up to 15% this year, wiping out the last 15 years of economic gains,” the White House gloated.
Both
sides of the debate agree the country is still hurting. Massive
increases in interest rates in the spring, designed to stabilise the
collapsing rouble, along with the withdrawal of foreign businesses, have
pushed it into recession. In the second quarter of the year gdp fell
by 4% year on year, according to official figures. Many of the
country’s 300 one-industry cities hurt by sanctions are in a full-blown
depression. Lots of people, especially educated types, have fled; others
are shifting assets out of the country. In the first quarter of 2022,
the latest available data, foreigners pulled out $15bn-worth of direct
investment, easily the worst figure on record. In May 2022 Russian
remittances to Georgia were an astonishing ten times higher in dollar
terms than the year before.
But The Economist’s
analysis of data from a wide variety of sources suggests that Russia’s
economy is doing better than even the most upbeat forecasts predicted,
as sales of hydrocarbons have fuelled a record current-account surplus.
Take, for example, a “current-activity indicator” published by Goldman
Sachs, a bank, a real-time measure of economic growth. This declined
dramatically in March and April, if not on a scale comparable with the
global financial crisis of 2007-09 or even the invasion of Ukraine in
2014. In subsequent months it has recovered.
Other
measures tell a similar story: of a recession, but not a deep one, at
least by Russia’s volatile standards. In June industrial production was
1.8% down on a year earlier, according to a paper published by JPMorgan
Chase, another bank. An index of service-sector growth, compiled by
sending surveys to managers, shows a smaller hit than during previous
crises. Electricity consumption seems to be growing again, after an
initial decline. The number of railway loadings, a proxy for goods
demand, is holding up.
Meanwhile,
inflation is easing. From the start of 2022 to the end of May consumer
prices rose by about 10%. The fall in the rouble made imports dearer;
the withdrawal of Western companies cut supply. But prices are now
falling, according to Rosstat. An independent source, published by State
Street Global Markets, a consultancy, and PriceStats, a data firm,
derived from online prices, shows similar trends. In its public
statements, the cbr now worries about falling prices as well as inflation.
A
stronger rouble has cut the cost of imports. And Russians’ inflation
expectations have fallen. A data set from the Cleveland Federal Reserve,
Morning Consult, a consultancy, and Raphael Schoenle of Brandeis
University shows expected inflation over the next year has dropped from
17.6% in March to 11% in July. With plentiful gas, Russia is also
unlikely to see a European-style surge in inflation produced by higher
energy prices.
Falling
prices are not the only thing helping households. True, the
unemployment rate, at an all-time low of 3.9% in June, is misleading.
Many companies have furloughed staff, some without pay, in order to
avoid registering redundancies. But there is not much evidence of a jobs
calamity. Data from HeadHunter, a Russian jobs site, suggest that the
economy-wide ratio of jobseekers to vacancies rose from 3.8 in January
to 5.9 in May—making it harder to find a job than before—and then fell
back a bit. Data from Sberbank, Russia’s largest lender, suggests that
median real wages have sharply increased since the spring.
In
part because the labour market is holding up, people can keep spending.
Sberbank’s data suggest that in July real consumer spending was pretty
much unchanged from the start of the year. Imports fell sharply in the
spring, in part because many Western firms stopped supplying them. Yet
the decline was not severe by the standards of recent recessions and
imports are now bouncing back fast.
Three
factors explain why Russia keeps beating the forecasts. The first is
policy. Vladimir Putin has little understanding of economics, but he is
happy to delegate economic management to people who do. The cbr
is stuffed with highly qualified wonks who took swift action to prevent
economic collapse. The doubling of interest rates in February, in
combination with capital controls, shored up the rouble, helping to cut
inflation. The general public know that Elvira Nabiullina, the bank’s
governor, is serious about keeping a lid on prices, even if this does
not make her a popular figure.
The
second relates to recent economic history. Sergei Shoigu, Russia’s
defence minister, may have been on to something in February when,
according to the Washington Post, he told the British government
that Russians “can suffer like no one else”. This is the fifth economic
crisis the country has faced in 25 years, after 1998, 2008, 2014 and
2020. Anyone older than 40 has memories of the extraordinary economic
tumult brought about by the fall of the Soviet Union. People have
learned to adapt, rather than panic (or revolt).
Parts
of Russia’s economy have long been fairly detached from the West. That
comes at the cost of lower growth, but it has made the recent increase
in isolation less painful. In 2019 the stock of foreign direct
investment in the country was worth about 30% of gdp,
compared with the global average of 49%. Before the invasion only about
0.3% of Russians with a job worked for an American firm, compared with
more than 2% across the rich world. The country requires relatively few
foreign supplies of raw materials. Thus the extra isolation has not had
much of an impact on the figures to date.
The
third factor relates to hydrocarbons. Sanctions have had a limited
impact on Russian oil output, according to a recent report by the
International Energy Agency. Since the invasion Russia has sold in the
region of $85bn-worth of fossil fuels to the eu. The way
in which Russia spends the foreign currency thus accumulated is
something of a mystery, given sanctions on the government. There is
little doubt, though, that these sales are helping Russia to continue to
buy imports—not to mention pay soldiers and buy weapons.
Until Mr Putin leaves office, Western investors will be reluctant to touch Russia. Sanctions will remain. The cbr acknowledges
that while Russia does not rely much on foreign materials, it is
desperate for foreign machinery. Over time, sanctions will take a toll,
and Russia will produce goods of a worse quality at a higher cost. But
for now its economy is stumbling along. ■
Read more of our recent coverage of the Ukraine crisis.