From
another perspective, however, Russia did surprisingly well. In the days
following its invasion of Ukraine in February, there was financial
chaos from Moscow
to Vladivostok. After Western countries imposed an unprecedented number
of sanctions, the stockmarket collapsed along with the rouble. At the
time it seemed Vladimir Putin’s “Fortress Russia” was crumbling.
Economists quickly downgraded their forecasts. Within days the consensus estimate of annual gdp
growth in 2022 dropped from 2.5% to a contraction of 10%. Some
economists were even gloomier: the White House looked for a year-on-year
decline in Russian gdp of 15%. Inflation surged across the country.
Russia
faced a squeeze on both the supply and demand sides of the economy.
Western businesses were pulling out by the dozen, limiting what Russians
could buy. Meanwhile the central bank doubled interest rates, raising
debt-servicing costs and thus further squeezing demand.
Within a few weeks, however, it became clear that the worst forecasts were not going to come to pass. Sanctions
have gravely damaged parts of Russia’s industrial base, such as the car
sector, which relies on foreign parts. Others, in particular those
enjoined by the state to help out with the war effort, have not done too
badly. During the summer and the autumn economists revised up their
growth forecasts. Now they expect the Russian economy to shrink by some
3-4% this year. Unemployment has barely budged, in part because firms
have been told to keep workers on, even if on lower or no pay.
Two
main reasons explain why Russia’s downturn has proved shallower than
expected: policy and trade. In the early days of the invasion the quick
actions of the central bank and regulators convinced ordinary Russians
that they were serious about tackling surging inflation. Inflation
expectations, having jumped, came back down again. Higher interest rates
encouraged the public to return money that they had taken out from
their bank accounts in the early days of the covid-19 pandemic,
preventing a financial crisis.
Sanctions
have been tough, but for most of 2022 there were few restrictions on
the sale of hydrocarbons (that is now changing). So far this year,
Russia has racked up a current-account surplus of over $220bn, twice its
level the year before.
This
foreign currency has helped finance imports. Many Western firms have
stopped selling their goods and services to Russia. But companies in
other parts of the world are only too happy to help—China’s, for
instance, have stepped up. Turkey appears to have become a go-between for Western companies looking to skirt sanctions. Russian imports have recovered a long way after a sharp drop in the spring.
“Real-time”
economic data paint a concerning picture for the West. At present, the
Russian economy is in better shape than expected. Meanwhile Europe,
weighed down by sky-high energy costs, is falling into recession. ■